For those with specks of grey, or more, in their hair, you would remember the time when getting a demand draft made in a public sector bank was a full day’s job. That, too, if one was friends with the branch manager or, perhaps, a friendly teller. And stock market old-timers would recall the time when one had to shell out more than 1 per cent of the trade value as broking charges to the brokerage firm that would execute their trades. And screams on the floors of the markets to execute trades were the sine qua non of a bygone era. 

Then came technology. The grey specks have seen the transformation unfold in banking, with private sector banks disrupting the space with net banking initially. And in the markets, the screams and paper shares were fast replaced by dematerialised, digital shares and digital trading. The ‘progress’ continued, with apps, wallets and what-have-you in the banking space, and even in stock market trading. The markets also saw discount broking firms offering a free execution platform from which one could invest in shares.

Today, both these spaces, and many more, are so digitally wired and intertwined that you can do practically anything, anywhere, anytime. Come to think of it, many young people today would probably not even know what the inside of a bank looks like.

Due to regulations, the industry has become more meritocratic. Deep pockets or legacy without performance or competency cannot accomplish much. What matters is performance and service

AASHISH P. SOMAIYAA
CEO
Whiteoak Capital Asset Management

Okay, that’s a little over the top, but you get the point. But there’s a bigger point under the surface here, which is that the newbies, the so-called digital native companies, have raced ahead of others in most sectors, except in highly regulated ones such as banking, where the traditional players have armed themselves to the point of being ‘almost’ digital natives. From telecom to insurance to travel and tourism to entertainment and many others, dominant legacy players were forced to adapt as a new set of upstarts backed with technology and innovation entered the fray and disrupted their backyards.

And now, the bugle has been sounded in another segment. We’re talking about mutual funds (MFs), a tightly regulated and highly competitive segment with most aspects already commoditised in one way or another. Here, the legacy players, the incumbents, have already embraced technology and innovation in a big way. They are big and smart enough to quickly adapt to any large-scale change. At the same time, the newbies are not to be wished away or dismissed. They have enviable track records in other spaces, and are stepping into a new arena with confidence and wisdom that come from being winners. Let’s take a look at the two corners and the combatants.

In one corner of the ring are The Oldies. These are more than 40 asset management companies (AMCs) with cumulative assets under management (AUM) of an eye-popping Rs 40.5 lakh crore, according to the Association of Mutual Funds in India (AMFI), which is the umbrella body of all MFs registered with capital markets regulator Sebi (Securities and Exchange Board of India). Of that number, the 10 biggest AMCs—the Goliaths—corner 80 per cent share, or cumulative assets of Rs 31.51 lakh crore. Each of the 11 largest fund houses boasts an AUM in excess of Rs 1 lakh crore—with the top three having an AUM of more than Rs 4 lakh crore each. So, they are big, they are experienced, they have deep pockets, and they are armed with the latest tech and apps and APIs and what have you. They have also been growing at a slick pace, on the back of increasing numbers of investors looking at MFs as the preferred mode of investing or entering the stock markets.

In the other corner are The Newbies. Important point: they may be Davids in MFs, but many of them are established players in other spheres such as broking, payments or even e-commerce. Data from Sebi shows that entities like Zerodha Broking, PhonePe, Helios Capital Management, Emkay Global Financial Services, Angel One, Alchemy Capital Management, Capitalmind (Wizemarkets Analytics) and Bajaj Finserv, among others, have applied for registration to launch mutual fund companies. Further, the recent past has seen names like Navi Mutual Fund, Samco Mutual Fund, NJ Mutual Fund and WhiteOak Capital Mutual Fund launch their schemes in the country.

Experts believe that the new players will have to create a niche for themselves with differentiated products as cost is not the biggest factor to play with in the MF space, unlike in many other sectors. Plus, the segment is strictly regulated with many aspects standardised, and the incumbents are already operating in a completely digital manner, making it all the more difficult for new entrants to pitch technology as a game changer.

Most certainly, this battle is going to be a fiercer one, and no matter which way the pendulum finally swings, it won’t be a cakewalk for the digital natives.

Currently, products are key in the MF space,” says Swarup Mohanty, CEO of Mirae Asset Investment Managers (India). “Gone are the days when brand power alone attracted investors. The scope has moved from a ‘good brand’ to a ‘good product’, though large players still dominate the MF segment.” Mohanty would know as his relatively young fund house is close to entering the Top 10 club in terms of AUM. Incidentally, Mirae has filed documents for schemes with investment themes like cloud computing, clean energy, artificial intelligence, and electric vehicles.

We will have both active and passive schemes and we will have a lot of debt products as well as we are very focussed on that segment. We are one of the few experienced asset managers to apply for a licence

DEEPAK SHENOY
Founder & CEO
Capitalmind

But Mirae is not alone. The arena of innovative schemes is seeing heightened action as the new players make their debut. Navi Mutual Fund, backed by Flipkart Co-founder Sachin Bansal, plans to offer investors thematic funds on metaverse, IoT, blockchain, and gold mining companies. Then, Samco Mutual Fund recently launched a Tax Saver Equity Linked Savings Scheme (ELSS) with a difference. “We are actually India’s first mid- and small-cap focussed ELSS. It is a differentiated proposition within the active space,” says Jimeet Modi, Founder & Group CEO of SAMCO, the MF’s parent company that is also into broking and wealth management. “We are in the business of offering differentiated strategies to investors and creating wealth for them. The key operating idea is that an asset management company needs to keep finding strategies that are not available in the market.” Most ELSS schemes invest majorly in large-caps, so SAMCO’s marks a shift in strategy.

Similarly, WhiteOak Capital Mutual Fund launched its maiden equity scheme this July while highlighting that the fund house employs a proprietary cash flow-based analytical and valuation framework, which provides unique insights in contrast to accounting earnings-based models. “In investment management, the disruption has to come from the ability to deliver superior performance or superior product innovation. It is not about transaction efficiency or costs alone,” says Aashish P. Somaiyaa, CEO of WhiteOak Capital Asset Management, a part of WhiteOak Capital, which is into investment management and advisory services.

Interestingly, Vasanth Kamath, Founder & CEO of smallcase Technologies, a company that offers a curated basket of stocks as investment options, agrees that while in the broking space the disruption was based on factors like cost and technology, in the MF space, it will be more about products. “I think we have a long way to go in terms of exposure that fund houses can provide in the MF format, which no one seems to be doing today. [A] bulk of the ETFs (exchange-traded funds) today are around two to three indices. Some fund houses are doing interesting stuff, but there needs to be more of that,” says Kamath.

ETFs are similar to MFs, only they are available for trading on the exchanges just like a stock. Incidentally, the three biggest equity MF schemes in India today in terms of AUM are all ETFs. The largest—SBI Nifty 50 ETF—boasts an AUM of Rs 1.52 lakh crore. But this does not mean that ETF is the only way forward for the new aspirants, as some founders come with a track record of active money management for the affluent and now are looking to enter the MF space.

Products are key in the MF space. Gone are the days when brand power alone attracted investors. The scope has moved from a ‘good brand’ to a ‘good product’, though large players still dominate the segment

SWARUP MOHANTY
CEO
Mirae Asset Investment Managers (India)

Samir Arora’s Helios Capital, a company that has both India and global-focussed funds, has also applied for an MF licence and the Singapore-based fund manager is clear that he will not go the ETF way. “We are still waiting for the Sebi approval so will not want to jump the gun. But having said that, ours is a company founded by fund managers and so we will be doing active fund management and not ETFs,” says Helios Capital Founder Arora. Yet, he feels some of the new players are likely to go the ETF route as “they have the audience and the flow and fit for those products”.

Incidentally, Arora is not new to the Indian MF space as between 1993 and 2003, he was the Chief Investment Officer of Alliance Capital’s Indian MF business.

Deepak Shenoy of Capitalmind, a well-known portfolio management service (PMS), has applied for an MF licence and already firmed up its strategy. “We will have both active and passive schemes and we will have a lot of debt products as well as we are very focussed on that segment,” says Shenoy, Founder & CEO of Capitalmind. (In active schemes, the fund manager actively does the stock picking wherein passive schemes mostly replicate an index in terms of stock constituents.) “We are one of the few experienced asset managers to apply for a licence. We currently have an active and a passive product on the PMS side and, hence, we understand the space.” Shenoy’s Wizemarkets Analytics—the registered name of Capitalmind—is eyeing an AUM of Rs 1-1.5 lakh crore in the next five to seven years. “We have applied because we think there is a huge market out there and the industry has only scratched the surface of what can be done in the long term. As India grows, the industry is also going to grow multi-fold from where it is right now. For that, if you have four to five more players, it is not going to make any major difference especially when the industry is expected to grow in a big way,” he adds.

Shenoy makes an important point. Apart from a certain level of innovation in product differentiation, performance will be the single-biggest pull factor for fund houses as an increasing number of investors look at investing in stocks using the MF route.

The newbies are clearly readying for a scrap. “Due to regulatory changes, the industry has become more meritocratic today. Deep pockets or legacy of parentage without performance or competency to generate performance cannot accomplish much,” says Somaiyaa of WhiteOak Capital. “Ultimately what matters in our industry is performance, perceived ability to deliver performance, communication quality and service.” 

Indeed, the MF industry has proven to be a Waterloo for many big names that found the going too tough and had to ultimately exit the highly competitive arena. Global majors like Morgan Stanley, Goldman Sachs, JPMorgan, Fidelity and ING, among others, tried their luck in the Indian MF space but ultimately moved out by selling their India business to competition. “People have forgotten all those who have perished,” says Dhirendra Kumar, CEO of Value Research, an MF tracking company. “This is a business where many dimensions are completely commoditised. Which means you have to be a really good manager. Performance is a key driver of MFs. If you perform, then you do well. If you make money for investors, they will invest with you.”

The element of performance has become all the more important now because the pace of penetration of MFs and the influx of new investors are at record levels. If one takes into account the growth in the number of folios—a unique number that the fund houses give to the investor—then the industry is in the midst of its best-ever phase. Data from AMFI shows that the number of folios has grown by over 20 per cent each year in 2022 and 2021—a huge jump from the earlier single-digit annual rises. Further, monthly inflows through systematic investment plans or SIPs are also at record levels with October witnessing SIP inflows of Rs 13,041 crore—the first time that the monthly flows breached the Rs 13,000-crore mark. In November, SIP flows were pegged at Rs 13,306 crore.

Disruption is a fancy word. When private sector MFs came, they disrupted the public sector ones. In financial services, tech is a big disruptor. In MFs, everyone has changed and they have bigger resources

DHIRENDRA KUMAR
CEO
Value Research

“The MF industry has grown significantly in the last few years. Newer investors are making their foray into MFs as can be witnessed by the increasing folio count and number of unique investor accounts,” says Kaustubh Belapurkar, Director of Fund Research at Morningstar, a global firm tracking MFs. “Given the increasing market, there is room for new players that bring something unique to the table. Many of these already come with large customer bases from their existing businesses, allowing them to cross-sell to their existing users.”

In a similar context, Mohanty of Mirae says that the new demographic and the new digital change is challenging everyone and that makes the segment open for newer players. The MF business is scalable and the market is ready for new players, he says. Scalability is an important play in the MF space as scale allows a fund house to lower costs. That could be an important differentiator in a segment where technology is not looked upon as a real disruptor. Then, there is also the element of active or passive funds, and some of the new fund houses appear to be tilting towards passive as part of their larger game plan to offer low-cost innovative products. “Whether it is active or passive investing, or global investing or thematic investing, all kinds of products are at play in India. With goal-based financial planning gaining popularity, investors will look for a product that they want rather than choose from plain-vanilla ones available,” says Mohanty.

Incidentally, Zerodha Founder Nithin Kamath has been earlier quoted as saying that his fund house will focus only on low-cost passive funds. Zerodha, PhonePe and Angel One declined to comment for this story.

In the current calendar year till October, as many as 131 new fund offers of passive schemes were launched—the first time that passive outnumbered active, which had 117 scheme offers in the same period. Further, the AUM of passive schemes in the same period rose to Rs 6.12 lakh crore from Rs 4.48 lakh crore in 2021, even as that for active remained largely unchanged at Rs 33.41 lakh crore this year till October, as per data from Morningstar. “Our long-term estimate of the industry trend is that there will be two clear-cut segments. One would be the pure active and the second would be passive, and industry players will have to make a choice,” says Modi of SAMCO. “There is a bunch of new players that wants to do passive but as far as product innovation is concerned, one needs to keep in mind that passive products can be copied overnight. Passive is all about scale and distribution. [The] only selection factor is cost. Cost is inversely proportional to AUM or size. Large passive players will always have an edge [in passive funds].”

Now, let us look at some numbers to understand the offerings from a few new fund houses that have launched their offerings, to see if there are any visible benefits in terms of costs at least. That is because it is not yet time to evaluate or compare them based on performance, since most have been launched recently.  

Navi Mutual Fund states on its website that its “low-cost funds coupled with a passive investing approach and strong leadership” makes it “one of the most popular and sought-after AMCs in the country”. Let’s examine that statement.

Within the broad category of equity funds, flexi-cap funds, which offer fund houses complete flexibility in their investment approach, are one of the most popular categories of schemes with an AUM of nearly Rs 2.53 lakh crore, as on November 30, 2022. According to data from Value Research, Navi Flexi Cap Fund, which has an AUM of Rs 221 crore, has an expense ratio—a percentage of the fund’s daily net assets value used to manage its operating expenses—of 0.43 per cent, but there are other flexi-cap funds with a lower cost component. For instance, ICICI Prudential Flexi Cap, with an AUM of Rs 11,911 crore, has an expense ratio of 0.41 per cent. PGIM India Flexi Cap has an expense ratio of 0.31 per cent on an AUM of Rs 5,291 crore. However, most of the largest flexi-cap funds in terms of AUM do have a higher expense ratio than that of Navi MF. Incidentally, Samco Flexi Cap Fund has an expense ratio of 0.87 per cent and an AUM of Rs 682 crore.

Meanwhile, liquid funds—that invest in fixed income securities like treasury bills, government securities and commercial paper with a maturity of up to 91 days—are the most popular within the debt category with a cumulative AUM of nearly Rs 4.10 lakh crore, as per AMFI data. Navi MF’s Liquid Fund has an expense ratio of 0.15 per cent, although similar schemes of fund houses including UTI MF, PGIM India and HSBC MF, among others, have a lower cost component. Even some of the biggest liquid funds like SBI Liquid (AUM of Rs 58,372 crore), HDFC Liquid (Rs 56,900 crore), ICICI Prudential Liquid (Rs 42,960 crore), Aditya Birla Sun Life Liquid (Rs 38,922 crore) and Kotak Liquid (Rs 30,840 crore) have expense ratios in the range of 0.18 per cent to 0.21 per cent, as per data from Value Research.

The Navi Nifty 50 Index Fund, however, is the cheapest among Nifty index funds with an expense ratio of 0.06 per cent. Almost all fund houses offer a similar Nifty index fund, but their average expense ratio is around 0.19 per cent.

Navi MF declined to comment for this story.

NJ Mutual Fund is another new fund house to enter the segment and its Balanced Advantage Fund has an expense ratio of 0.54 per cent, as per data from Value Research. Incidentally, there any many other balanced advantage funds—popularly known as the BAF category—with a lower cost component.

To be sure, one needs to look at the returns and the portfolio of schemes; cost cannot be the sole deciding factor. Index funds benchmarked to the same index, however, will not offer any differentiation in terms of stock constituents.

 Gaurav rastogi, Founder & CEO of Kuvera, an online wealth management firm, believes that the next 10 years will see a huge wave of innovation in AMCs. “Starting from distribution to get the next 100 million investors into MFs, the other big innovation will be in products, where we are already seeing a lot of Big Data and proprietary data sets being used in the fund management process,” says Rastogi, adding that in more mature markets, every generation comes with its own unique sets of needs and sensibilities when it comes to investing. “Technology is a great leveller, which can help newer players to close the gap with existing players quickly by avoiding some of the pitfalls of legacy systems. However, domain knowledge will continue to be a distinct advantage for existing AMCs,” says Rastogi.  

Interestingly, the regulatory framework for the MF industry has ensured that while there is scope for innovation in terms of product design and structure, the incumbents are not really at a disadvantage as such. Most of the processes and compliance requirements are cast in stone and, hence, there is little scope for deviation, purely with an attempt to cut costs and offer a cheaper alternative—compared to those available currently—to investors. “Disruption is a fancy word. When private sector MFs came, they disrupted the public sector ones. In financial services, technology is a big disruptor when the old players or the incumbents are unable to change with the new reality. In MFs, everyone has changed and they have bigger resources,” says Kumar of Value Research, adding that the heart of a retail financial services business is trust and the older fund houses have greater trust of consumers.

So, while one can say that there is definitely space for newer players, the growth trajectory of the new entrants is not expected to be similar to what was seen in some other sectors such as equity broking or banking. “Transaction execution is highly standardised and pricing is regulated, operating in a very tight range. I am not saying there is no scope for disruption. I am only saying the same players with the same modus operandi may not have the same impact as they have achieved in other areas,” says Somaiyaa. “If industry participants can differentiate and innovate or execute better than the incumbents, we can surely accommodate a greater number of players.”

Shenoy highlights the fact that since just around 5-6 per cent of the population invests in the stock markets, MFs will play a massive role to bring another 20-30 per cent of India into the investing landscape. “Someone in the 1920s said that ‘everything that can be invented has been invented’. So, one does not know what can be done until it is done. There is massive opportunity in the [MF] space in terms of product innovation, process innovation and conceptual changes,” he says.

While there seems to be a unanimous view that there is space for new players and that there will be innovation as well, only time will tell whether the MF arena will see a battle of the old against the new or would it be just among the bigger ones—old and new alike—who will continue to enjoy the benefits of scale. Either way, it is the average Indian investor who will emerge as the ultimate winner with access to innovative products at an affordable cost and, with the passage of time, a track record of performance also to choose from.