Is a Mutual Fund House Consolidation On the Cards?

Remember an article titled “Top Mutual Fund Houses in India by AUM” in Feb last year in this blog? We had seen the top 25 and the bottom 5 fund houses in the country by “Assets Under Management”. We have more than 40 fund houses in our country and the stock market regulator SEBI is thinking about some new regulations that might make investors happy. At the same time, this might spell bad news for the small mutual fund houses and schemes. Gone will be the days when fund houses can happily flout some new fund scheme and forget about it soon after. The idea behind this article is to go over these recent developments and how this might affect the fund houses in our country.

New Development No. 1: Revised Net Worth Requirements for Fund Houses

The current requirement for any Fund House to start is 10 crores. SEBI is planning to raise it to 100 crores.

Why: The idea behind this rule is to restrict cash-strapped entities from flouting their own fund house and starting a mutual fund scheme to attract investor funds.
Impact: As of end of last quarter (Sep’13) all the fund houses in our country are more than 100 crores by size. The smallest fund house Daiwa Mutual Fund has 131 crores worth of funds in its corpus. So, this scheme might not impact any of the existing fund houses but it might prevent newer entities from entering the fray.

New Development No. 2: Sponsors Need to Invest in their own Funds

As of now, there is no requirement for fund houses and the sponsors to invest their own funds into the mutual fund schemes they flout. SEBI may ask sponsors to invest in its own New Fund Offers (NFOs) to the extent of 1% of total amount raised through a new fund or Rs 50 lakh whichever is higher.

Why: The idea behind this rule is that, if the fund house has its own funds invested in a scheme, it will give them additional motivation to perform better. If they don’t manage their funds properly, they will end up with losses themselves.

Impact: This would only impact the NFO’s of fund houses but still, this will force fund houses to be more prudent in their decisions to ensure that their capital is preserved too. If I were managing a fund that has 50 lakhs worth of my money, would I be reckless in my investment decisions?

What Does This Mean for Fund Houses?

Smaller Fund Houses might be forced to stay cautious and smart in order to survive. If they are unable to meet the minimum requirements set forth by SEBI they may be forced to sell their businesses. This may result in consolidation between fund houses with smaller ones shutting down shop and selling their assets to larger and more established fund houses.

What Does This Mean For Investors?

As Investors our first and foremost priority while selecting a mutual fund house is that, they will make the best choices with respect to our investments. If the fund sponsor is putting his own money into the fund, which will increase the probability of the fund manager making the best investment decisions. So, as investors we stand to win – big time…

My Thoughts:

As someone who has been following the Indian stock market for many years, there is a very good probability that there will be a mutual fund house consolidation in the near future once these guidelines are enforced.

At the end of the day - these new guidelines by SEBI will be good news for investors.

Happy Investing!!!