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Fidelity Mutual Fund, a renowned name in the mutual fund industry which had setup its business in India in 2004 is now in search for a buyer to sell its India asset management company better known as FIL Fund Management Private Limited (FFMPL).

The performance of its funds especially equity funds have been quite decent since their inception. The table below depicts, how various categories of mutual fund schemes from the stable of Fidelity Mutual Fund, have performed vis-a-vis to their benchmark - BSE 200.

  Performance of Fidelity Mutual Fund Schemes

Scheme Name	Returns in (%)
	Inception	1 Year	3 Yr - CAGR	5 Yr - CAGR	Since Inception
Diversified
Fidelity Equity	16-May-2005	-5.2	27.9	8.5	19.3
Fidelity India Growth	23-Oct-2007	-5.2	28.5	-	3.1
Fidelity India Spl.Situations	22-May-2006	-6.0	29.3	4.9	9.7
Fidelity India Value	08-Jan-2010	-10.0	-	-	-1.1
Equity Linked Savings Scheme
Fidelity Tax Advt	27-Feb-2006	-6.1	28.4	9.2	12.5
Fund Of Funds
Fidelity Global Real Assets Fund	11-Feb-2010	-0.7	-	-	14.0
Speciality
Fidelity International Opp	28-May-2007	-5.2	27.8	-	5.3
Benchmark
BSE 200	-	-9.5	22.9	3.8	-

(Source: ACE MF, PersonalFN Research)

 

So far, as revealed above, most of them have outperformed the returns generated by their benchmark index across time frames, while some of them have even managed to be amongst the top performers in the category too. So, then what went wrong with Fidelity which provoked them to take a drastic step. Let’s analyse.

  Cost Structure for FIL Fund Management Private Limited

(Source: Annual Report of FIL Fund Management Pvt. Ltd., PersonalFN Research)

 

The graph above depicts the cost structure followed by FFMPL since its entry in the Indian mutual fund industry. So far employee remuneration and establishment expenses have proved to be major cost centre for the fund house. Moreover, they being fixed in nature, and also due to the fact that, to run a fund house effectively you require competent human resources and set-up; the fund house has had less scope in trimming them as well. It is noteworthy that in the business of asset management, retaining competent talent is very crucial. But for FFMPL costs incurred on employees has been on a steady rise, barring the year 2008 when the global markets experienced a recessionary phase. For instance when the fund house setup its business in India in 2004, the employee expenses were Rs 8.9 crore (for the year financial year 2004-05), which has shot up to Rs 68.1 crore until last financial year; which is whooping increase of 666% in the last 7 financial years.

FFMPL thus far, has been sailing with accumulated losses to the tune of Rs 306.85 crore (as per its annual report 2010-11), as it could not manage to generate the required amount of income year-on-year to compensate for the huge costs for the company.

Action plan for investors in various schemes of Fidelity Mutual Fund:
Investors need not panic and rush with redemption of their investments in various mutual fund schemes of the fund house, merely because they are considering selling their Indian mutual fund arm. Please understand ‘planning to sell its Indian mutual fund arm’ means there may be a change in the sponsor of the mutual fund business and the Asset Management Company (AMC). The Assets Under Management (AUM) i.e., your money invested would still be managed by the incoming new sponsor. Also, the new sponsor (or the buyer) may not necessarily go in for change in the fund management team and the investment processes and systems followed by the current AMC. There have been cases erstwhile of fund houses being taken over by other AMCs and have most of the time retained the fund management team as well as maintained the investment processes and systems.

 

Our view:

We believe that such an event is not a one-off case and there have been cases like this earlier in the mutual fund industry. Fidelity as a fund house has established a good track record, and as long as their investment processes and systems are intact along with no major change in the fund management style, the schemes under Fidelity mutual fund are bound to maintain their decent performance in the future as well.

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Comments
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