scorecardresearchWhy are wealth management firms jumping on the mutual fund bandwagon?

Why are wealth management firms jumping on the mutual fund bandwagon?

Updated: 15 Sep 2022, 12:28 PM IST

As capital markets regulator is geared to give mutual fund licences to eight more entities, this sector is likely to get more crowded. We explore the reasons for the shift, and everything that lies in between

Recently Helios Capital was given the in-principle approval to start a mutual fund

Recently Helios Capital was given the in-principle approval to start a mutual fund

The race to roll out best performing funds and importantly to beat the broader benchmark indices is set to get hotter with capital markets regulator Securities and Exchange Board of India (SEBI) contemplating to grant licences to run mutual funds to eight wealth management firms while another one — Helios Capital — has just been granted the in-principle approval.

The ones that are now waiting in the wings are Emkay Global Financial Services, Angel One, Abira Securities, PhonePe, Alchemy Capital Management, Abira Securities, Wizemarkets Analytics and Unifi Capital.

As a matter of fact, SEBI gave its in-principle approval to three contenders i.e., Bajaj Finserv, Zerodha Broking and Frontline Capital Services, to roll out mutual fund and their final registration is under consideration.

Here we dig deeper to know whether mutual fund business gives a bigger leeway to the wealth managers that bring them in the fold of mutual funds.

Benefits it offers

We spoke to a number of industry insiders and experts to delve deeper into the reasons for the PMS firms to foray into mutual fund business.

Some believe that running a mutual fund gives superior control over execution and performance to wealth managers.

“Traditionally portfolio managers have offered investment services through the PMS structure. However, unlike PMS, Mutual funds allow wealth managers to pool assets at the scheme levels, which enables superior control over execution and performance. Many wealth managers plan to provide Multi asset portfolios without impacting the pace of implementation, and MFs allow that. That is why so many managers are looking to set up MFs,” says Vaibhav Porwal, co-founder of Dezerv, a SEBI-registered portfolio management firm.

Trust Mutual Fund's CEO Sandeep Bagla says that running a mutual fund is complementary to the other financial services that Trust Group provides.

"With the launch of TRUST Mutual Fund, the TRUST Group can now offer its investment expertise a wider set of investors and hence the mutual funds is complementary to its existing services," says Mr Bagla.

Amol Joshi, Founder of PlanRupee Investment Services, says there are multiple reasons for these firms’ shift to mutual fund business, which include the low-entry barrier offered by mutual funds and the availability of greater number of opportunities.

“In the mutual fund business, there is low entry barrier whereas in the PMS firms, the minimum requirement is 50 lakh. And the typical investor still invests via SIP which are facilitated by mutual funds. Also, there are around 10 crore demat accounts where mutual funds have 3.5 crore unique investors, so still there is 2X or 3X penetration opportunity available in the mutual fund industry. This is bigger than the population of several countries,” said Joshi.

“Last, in PMS there are only certain solutions that are provided unlike the mutual fund business where opportunities are immense," he adds.

He also added that the increased competition is likely to benefit the end users i.e., retail investors.

“Whenever there is a higher competition, the end user stands to benefit like we saw in the airline sector. But this will happen only when there is an innovation, failing which the large number of mutual fund players won’t benefit,” he added.

Key reason of transition

The portfolio management service providers which have lately entered the MF ecosystem believe that entering mutual fund business was a natural extension for them after having developed expertise in the area.

The NJ Group has been part of the mutual fund ecosystem for more than 25 years. We have built up our knowledge and understanding of the MF business over this time. In addition, we have been part of the asset management industry for more than 12 years offering portfolio management services (PMS) since 2010. Having pioneered factor-based investing in India over the last decade and acknowledging the relative absence of this technique in the MF industry, it was a natural extension for us to launch a mutual fund,” Rajiv Shastri, Director and CEO NJ AMC.

He further highlights that they were looking forward to a differentiated approach to set them apart from rest of the crowd.

“We offer a clearly differentiated approach to investments which allows us to break the clutter and stand out. Our maiden NFO garnered more than Rs. 5,000 crore during its NFO and reinforced our belief that the market was ready for our investment approach. Combined with our PMS asset, we currently manage more than 8,500 crore making us the premier factor investing firm in India,” he adds.

While highlighting the difference between the two set of services i.e., PMS and mutual fund, Mr Shastri says, “On the surface, the one significant difference is the extent of regulation that the businesses are subject to. As such, for us, this difference was not as big as it appears which allowed us to build swiftly.”

"A mutual fund house offers only its proprietary product instead of distributing third party products in case of wealth management, " adds Mr Bagla.

This is the two-tiered benchmarking structure for mutual fund schemes.
First Published: 15 Sep 2022, 12:28 PM IST