Impact 
The capital market sentiment has improved dramatically over last 1 ½ years in India. Current stock market rally and relentless fall in bond yields is not only attracting retail investors to markets but is also enticing mutual fund houses to buy out businesses of other mutual funds. As Asset under Management (AUM) of a mutual fund house grows, it directly results in improved earnings for the asset management company. But you might be wondering what would change for investors. PersonalFN tries to address your queries pertaining to Mergers and Acquisition (M&A) in the mutual fund industry.
On paper, nothing changes for mutual fund investor when the ownership of an asset management company changes hands unless schemes are merged too. However, the way your money would be managed in future, changes significantly. Therefore it becomes important for you to track news of M&A closely.
M&A in Indian mutual fund industry
Over last few years, many fund houses such as Fidelity Mutual Fund, Diawa Mutual Fund and AIG Mutual Fund among others have exited businesses. Fierce competition, lack of adequate profits and lacklustre retail participation made it unattractive to do business in India for many of exiting entities. The M&A activities may intensify further in 2015 with improved market conditions.
You may potentially see following fund houses exiting businesses in 2015
How investors should read these developments?
If you have invested in a scheme floated by a fund house that is potentially going to be taken over, you have to carefully check the track record of the potential acquirer. For example, a fund house with no track record of managing money in India acquires the India based fund house; the performance of funds may deteriorate. Similarly, if a fund house that doesn't follow processes and excessively depends on iconic fund managers, takes over a process driven fund house, performance of funds that are being taken over is affected.
In addition, you also need to look at the valuations at which the fund houses are bought. If a deal happens at higher valuations and acquirer shells out huge money, its profitability gets affected. Future of any asset management company hinges on its profitability. In the recent past, a few fund houses have bought out other fund houses by paying as high as 7% of AUM. Moreover, it is also possible that, post-acquisition, asset base becomes unmanageable to the acquiring fund house and a few schemes may go out of focus with the fund house, resulting in underperformance.
PersonalFN is of the view that, at present top five players are dominating the mutual fund operations in India. As anticipated, if SBI buys out UTI Mutual Fund and merges SBI Mutual Fund with itself, it may become the largest fund house by AUM. However, PersonalFN believes, such deals may hardly change anything for investors. On the contrary, it may eliminate competition which may not be beneficial for the industry. Minimum net worth criterion is already making things difficult for smaller fund houses. PersonalFN believes, unless the merger is mutually beneficial for the asset management company as well as for the investors, it offers little benefit. PersonalFN believes, rather than buying out other fund houses in quest of growing AUM, fund houses would be better off if they launch limited number of New Fund Offers (NFOs) or completely avoid launching new funds. Focusing on improving the performance of the existing funds and educating investors wisely to make them aware about benefits of investing in mutual funds, may pay well for them. PersonalFN is indifferent to size of the fund house. Consistent superior performance is the key to generating long term wealth.
Add Comments