This Article was originally published in The Global Analyst

Generally, business exits happen on the back of poor industry showing. But in the case of Indian mutual fund industry it seems to be the opposite

US asset manager Invesco announced to exit the mutual fund business in India in April 2024. This is not the first of its kind. We have witnessed several foreign firms like Goldman Sachs, JP Morgan, Fidelity, Morgan Stanley, etc. exit the Indian mutual fund landscape. These are very renowned global names in the global mutual fund space. 

Generally, business exits happen on the back of poor industry showing. But in the case of Indian mutual funds, it is the opposite. From a modest Rs. 10 lakh crores of Assets Under Management (AUM) in 2014, the industry has grown to nearly Rs.55 lakh crores by end of 2023. The question then is what is forcing these exits in such a growth industry.

Before we get into the analysis of why this is happening, a look at the top 10 mutual fund houses reveals many things. In an industry populated by nearly 45 players, the top 10 account for nearly 80% of the market share. The top 3 account for a lion’s share of the industry (41%) and all of them have the advantage of tapping their domestic banking channels for sales. 

While many foreign firms have exited the Indian space during the past few years, we also notice some standalone foreign firms like Nippon & Mirae in the Top 10. It is interesting to see them in the top despite not having local bank support. 

Some plausible reasons as to why foreign firms find it too hot to survive the Indian mutual fund landscape can be enumerated here:

1. High Cost: Mutual fund is a high-volume low margin business and hence controlling the cost becomes very important for survival. Foreign firms, especially the ones based out of US and Europe tend to mirror their global cost structures into the Indian operations which can make it unviable in the long run. Keeping cost low is crucial in an industry that is quickly getting commoditized thanks to the proliferation of index funds and ETF’s. 
2. Inability to Scale: As noted before, the top 3 in the list enjoy the support of bank branch network to push the sales. The top ranked mutual fund i.e., SBI mutual fund can enjoy the backing of nearly 22,000 bank branches of SBI not a small advantage by any stretch of imagination. ICICI Mutual fund and HDFC Mutual fund boost of around 5,000-6,000 bank branches respectively and hence they enjoy head start compared to non-banks. Banks enable the mutual funds to establish a strong distributor network which foreign firms may find difficult to replicate. However, on the 4th, 6th and 7th in the list are non-banks as well. Also, we also notice other bank sponsored mutual funds especially from the public sector like Bank of India or Bank of Baroda which presently is not in the top of the league. 
3. Regulations: Foreign firms, normally headquartered in US/Europe must undergo far higher regulatory scrutiny in their home markets and subsidiaries compared to others. This is not to say that Indian regulators are slacking. It is just that foreign sponsored mutual funds may have to contend with dual regulatory pressures i.e.., home market and foreign market. This may have increased their cost and potentially slowed down the speed.
4. Non-Core: The AUM of Indian mutual funds at USD650 billion is a fraction of say USD 10 trillion AUM of Blackrock (the top mutual fund in the world). Hence, for most of the global big names, India is still a small market and therefore the struggle may not be worth the effort.
5. Dynamic M&A landscape: While the industry is growing rapidly, we have also witnessed several mergers, takeovers, and acquisitions among AMCs in the last few years making the eco system very dynamic. This dynamic eco system facilitates ease of selling business which foreign mutual funds resort to when the going gets tough.

It’s advantage desi AMC’s for now.

For now, the advantage clearly is with domestic bank backed mutual funds to hold on to their strong market shares while select foreign firms will aggressively compete through innovative product offerings and management styles. Many foreign firms will start with small stakes or Joint ventures and will be willing to test the waters. While most of them see the growth very clearly, operating in India need not be easy. Also, foreign firms are quick to cut their losses when their business plan fails, which can also explain the swift exits of many foreign firms.