Competition boost

In the latest edition of the Association of Mutual Funds of India (AMFI) Summit, the SEBI Chairman dampened the celebratory mood in the fund industry by pointing out some disconcerting aspects of its stellar growth. Flagging the increasing concentration of assets in a few hands, he questioned if the industry reflected healthy competition. Pointing to the high profit margins of leading players, he asked if asset managers were passing on economies of scale to investors. He also asked the industry to be more vigilant on warning investors about the short-term risks of fund investing. While the SEBI chief has homed in correctly on the industry’s weak points, the question is if these issues really need regulatory intervention or can be left to the self-correcting mechanisms of the market.

Take concentration; it is certainly a fact that as the assets managed by Indian funds have galloped from ₹8.5-lakh crore to ₹23.5-lakh crore in the last five years, the top four asset managers have tightened their stranglehold on the market, despite the 38 other players in the fray. The top four now manage 47 per cent of the industry’s assets compared to 44 per cent five years ago. Yes, this has meant high profits for industry leaders, but there is little evidence so far that this has hurt fund investors. Given that SEBI regulations enforce a slab-based cap on fund fees, larger funds typically charge much lower fees than smaller ones. In the high-risk financial services industry, retail investors also tend to voluntarily gravitate towards established names with a demonstrated five- or 10-year record. Should any of the leading AMCs slip up on performance, investors will likely switch. It is true that the expense ratios of Indian funds have not declined in line with expanding assets. But this again is a function of the fund industry’s ability, in the last ten-years, to deliver benchmark-beating returns to investors, net of fees. Should this margin of outperformance shrink, investors are bound to reassess their choices. SEBI also needs to keep in mind that despite their recent growth, even the largest Indian AMCs remain midgets in the global context and that lack of scale was the key reason why a Morgan Stanley or a Fidelity exited India.

However, there are certainly three fronts on which SEBI can act to ensure that competition thrives in the MF industry. One, it can ensure that larger AMCs don’t unduly influence distributors through over-the-top incentives. Two, it can revisit its expense slabs set many years ago, to specify even tighter caps for schemes larger than, say, ₹2,000 crore. And finally, it must actively encourage the rise of a vibrant passive fund industry by widening the basket of index providers and innovative indices. After all, globally, it is index funds and ETFs that are today the most potent competitive force keeping money managers on their toes.

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