KEY TAKEAWAYS
The article discusses the significant growth in India's wealth management sector, particularly focusing on the mutual fund industry, driven by increasing household incomes and changing investment patterns.
It highlights SBI Mutual Fund as the market leader, benefiting from its extensive distribution network and economies of scale, positioning it well to capitalize on the industry's growth.
The article emphasizes the under-penetration of mutual funds in India compared to developed economies, suggesting substantial room for future expansion.
It outlines the importance of systematic investment plans (SIPs) in providing stable cash flows and reducing redemption risks during market downturns.
The article concludes by presenting SBI Mutual Fund as an attractive investment opportunity in the unlisted markets, supported by macroeconomic factors and strong company fundamentals.
Mercedes cars, latest Apple iPhones, exotic foreign vacations are all common sights for Indians nowadays. Thanks to the growing wealth of the middle class in the country. As per FY2023 Income Tax Data (quoted in Indian Express), the highest jump in income tax filings was witnessed in the INR 20-50 lakh income bracket where the taxpayer base grew by a massive 54% when compared to the pre-COVID levels of FY2020. Since COVID a lot of spending and investment patterns have changed.
Naturally, when household income increases, investments in capital markets tend to rise. And who hasn't heard about the mutual fund story in India? Newspapers, magazines, and research reports frequently highlight the massive AUM growth of top fund houses in the country. And why not? The industry has seen an exponential increase in their AUM, largely due to retail inflows.
In this article, we will discuss the wealth management space in India and how the sector is becoming a very attractive spot for investors. Even though there are several companies listed on the exchanges in this sector, in this article, we will specifically talk about a fund management giant SBI Funds Management Limited which owns and runs SBI Mutual Fund (SBI MF).
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The Wealth Management Landscape
Before we get started on the specifics of SBI MF, it's good to understand how the overall mutual fund has evolved to set some context.
Mutual Funds are just the tip of the iceberg when it comes to the wealth management or capital markets space. The spectrum is actually quite wide. Here are some of the listed players that are part of this chain:
Distributors (Help distribute investment products) - Anand Rathi, Prudent Corporate Advisory, etc.
AMCs (Manage Private and Public Wealth) - 360 One, HDFC AMC,
Exchanges - MCX, BSE
Brokers (Facilitate trading of securities) - Motilal Oswal, Angel One, IIFL Securities
Market Participants or Financial intermediaries (Clearing Houses, Transfer Agents, Registrars, etc.) - CDSL, KFintech, CAMS.
The Mutual Fund Space In India
The entire equity market cap in India is roughly $5 trillion, with mutual funds managing about 15% of the total assets. In contrast, in the US, mutual funds manage almost 30% of the total equity assets. This gap is even wider in the fixed-income space.
Penetration
The share of retail investors in mutual funds has grown, driving overall inflows. Not only are existing investors putting in more money, but the number of unique SIP holders and folios is also skyrocketing.
(Source - SEBI Annual Report 2024)
This is truly a golden time for mutual funds. While banks struggle to keep their deposits, mutual funds are booming with rapid growth in their capital base and this is only going to grow further with time.
Market Share
To no one's surprise, SBI Mutual Fund has the highest market share, managing over 16% of the total industry AUM. Its parent company, SBI Bank, has a vast branch and distributor network, making it easier for the AMC to sell its products to a large consumer base.
Another key point is that the top 5 players in the industry manage 56% of the total assets. This indicates consolidation at the top, meaning the industry leaders will benefit greatly from the overall growth of the industry.
(Source - ICRA MF Report for quarter ended June 2024)
Power Of Distribution Network
Before 2016-17, almost the entire mutual fund AUM came through mutual fund distributors (MFDs). However, with the onset of discount brokers and investors becoming much savvy, the share of direct money has increased significantly.
Still, roughly 77% of the equity investments by retail and HNI investors are made through intermediaries (Regular plans) while only 23% is made through direct plans. This shows the relevance of MFDs in the mutual fund ecosystem.
Source: AMFI
These distributors can be your local bank branch, small local distributors, or national players like NJ Wealth and Anand Rathi.
Distributors earn from 'Regular' Mutual Fund Plans where the AMC charges an extra expense ratio (0.5% to 1.5%) over the normal expense ratio of Direct Plans.
Thus, fund houses must adequately compensate distributors to drive inflows into their funds while also keeping the overall expense ratio low to deliver better net returns. This is where larger players can undercut smaller players by offering more attractive deals to MFDs, driving the majority of inflows into their funds.
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T-30 stands for top 30 cities for a mutual fund while B-30 stands for beyond 30. SEBI has set out different norms for these 2 categories including expense ratio limits.
Growth Drivers For MF Industry In India
Mutual funds in India have grown significantly in the past decade, but this might just be the beginning. Macro indicators suggest there is plenty of room for future growth in this industry.
As the overall industry AUM increases, market leaders will continue to expand, while smaller players will need to compete for the remaining share.
Under-Penetration
As a percentage of GDP, MFs manage a much smaller AUM when compared to the developed economy. If things stay the same, this number should naturally increase over time.
(Source - Nippon AMC Annual Presentation)
Increase In Household Savings and Income
One of the key factors driving the mutual fund sector is household savings. Traditionally, savings have gone into real estate and fixed deposits. In recent years, equity markets have provided better risk-adjusted returns compared to other asset classes. As a result, mutual funds have received a significant portion of these savings.
If household savings continue to grow, supported by higher incomes and a larger working population, mutual funds will greatly benefit.
(Source - Nippon AMC Annual Presentation)
Domestic Inflow
AUM growth doesn't give a complete picture of the growth in mutual funds or the entire industry because it includes mark-to-market gains on the value of existing investments.
The true picture comes from net inflows and SIP inflows. If we look at the net inflows over the past 8 years, the growth has been quite remarkable.
(Source - HDFC Securities Monthly MF Report)
AMCs love SIP plans because they provide a predictable and stable cash flow without requiring high commissions for new clients and reduce one-off redemptions during market downturns.
A consistent increase in SIP flows also indicates that investors are becoming more comfortable with mutual fund investments, with fewer major redemptions during downturns. Here is a chart that shows the steady growth in the inflows of systematic plans.
(Source - HDFC Securities Monthly MF Report)
Now that we understand the major sector figures and trends, let's look at individual players to learn how to analyse investment opportunities in businesses like mutual funds.
The Business Of SBI Mutual Fund
SBI Funds Management Ltd. operates SBI Mutual Fund which is the largest mutual fund in the country, with a lead of ₹2.3 Lakh Crores (see the table from ICRA above under the Market Share header). It is primarily owned by SBI Bank (62%), with Amundi Asset Management from Europe holding a significant 36% stake.
As mentioned earlier, 50% of the total inflows in the mutual fund industry come through the distributor network, and 77% of retail inflows come from these networks.
Therefore, it is reasonable to assume that to become a leader, Asset Management Companies (AMCs) need to adequately compensate the distributor network and increase the number of empaneled national and MFD distributors. Let's explore how SBI Mutual Fund achieves this and how the industry dynamics work.
Industry Leader And Market Dynamics
AMCs earn by deducting expense ratio from NAV at the end of each day. The idea is, that as the fund grows bigger, the TER of the fund is reduced accordingly. This practice is mandated by the regulator.
(Source - AMFI)
So, the yields (revenue) that a fund house earns on equity, debt, and money market schemes slowly decrease as the AUM goes up. However, the total revenue still increases because the rise in AUM offsets the lower yields.
Now, you might wonder, what does this have to do with market leadership? Well, the commission that a distributor earns in a regular mutual fund is in addition to the TER of the Direct plan.
When the TER goes down, fund houses have more room to offer higher commissions to distributors without increasing the ER of Regular plans. This is because the gap between the ER of Regular plans and Direct plans widens as AUM crosses certain benchmarks.
Thus, funds with higher AUM can offer better commissions to distributors while keeping the ER of Regular plans constant or slightly decreasing it.
SBI Mutual Fund, with the highest AUM and a much larger fund size, may find it easier to attract inflows and maintain its leadership through its distribution network.
What we learned above is possible: larger AMCs incentivizing distributors to direct inflows into their funds. But currently, an opposite trend is happening in the market. Let me explain.
In recent times, the share of SIP flows in the net flows of the industry has increased significantly. Once a fund has reached a certain AUM, AMCs no longer need to incentivize distributors for that particular fund, as the SIP flows will come in every month regardless of the commission structure.
This has changed the market dynamics and further favored market leaders. Top players will have huge SIP inflows every month, thanks to their older clients and large distributor network, so they won't need to spend more on commissions. Meanwhile, smaller players will have to increase their commissions to attract flows into their funds.
This market dynamic will remain constant as long as SIP inflows stay steady. However, if systematic flows start to decline, bigger funds will need to increase their commissions to drive higher inflows.
AUM Book And Yields
AMCs measure their revenues in terms of percentage yield on AUM. Basically, how much money are they earning on the overall assets they manage.
If we look at the yield on average aum of FY24, for HDFC AMC and SBI AMC. We would see that HDFC has a 48bps yield on portfolio, while SBI has only 36bps.
SBI Mutual Fund Profit & Loss Statement, average AUM for FY 24 was INR 9.5 Lakh
HDFC Mutual Fund Profit & Loss Statement, average AUM for FY24 was INR 6.5 Lakh
The overall yields decline as the expense ratio drops with an increase in AUM, influenced by regulatory TER limits and the desire to attract direct fund investors, and SBI MF's significantly lower yields compared to HDFC are due to its large ETF book, including the SBI Nifty 50 ETF with a very low expense ratio.
Finances
Regarding the rest of the finances, the structure of the P&L differs depending on the size of the AUM. For every incremental increase in AUM/inflows, the corresponding infrastructure and manpower costs increase at a much slower rate. Thus, the profit margins are quite high for bigger players.
For funds like SBI and HDFC Mutual Fund, they definitely benefit from economies of scale.
For top 5 players, the P&L breakup generally looks like this:
10-12% goes towards employee benefit expense
Other expenses such as NFO, new product launch, opening of branch etc. takes up another 8-10%.
All the other miscellaneous costs make up another 2-5%.
The overall Profit Before Tax margins are quite high at 75-80%.
In the past 5 years, the NIFTY 500 index has increased to 2.5x. In these years, mutual funds AUM have skyrocketed, and SIP books have flourished. During this bull phase, if SBI MF were a listed company, all analysts would be left scratching their heads. The company’s results have outperformed all expectations.
It had one of the highest AUM growth rates, even with the largest base. One could say that it was on the back of M2M growth, but given how it outperformed other peers in the same market, it's safe to say that net inflow growth was one of the main contributing factor.
With the growth in AUM comes growth in revenue, which showed an average increase of 17% in the last 5 years. The economies of scale kicked in and profitability metrics improved significantly as well.
Source: SBI MF Annual Report
As we saw earlier, volume or the size of the asset book is the bread and butter of the industry, and as the AUM grows, the profitability metrics become better. Thus when we compare SBI to other peers, one shouldn’t be too surprised to see the former beating the industry in almost every metric.
SBI has the highest return on equity and highest profit margin in the industry. Companies like UTI and ABSL that manage less than 1/3rd money as that of SBI, have much worse ROEs and PAT.
Growth Prospects
Now that we have seen the historical performance, let's see what we can expect of the biggest player in terms of future growth.
Distribution
According to quarterly conference calls from many mutual fund houses, the increase in inflows from B-30 cities is much higher than those from T-30 cities. This is due to the lower penetration of mutual funds in Tier-2 and Tier-3 cities.
To establish a presence in these areas, mutual funds usually need to open new branches and enlist distributors, as online/direct investments are not a major source of inflows from these regions.
Unsurprisingly, SBI Mutual Fund has the largest distributor network in the country, with 110,000 empaneled distributors and 285 branches. In comparison, the second-largest player, HDFC AMC, has 85,000 distributors and 255 branches.
The top players in the industry have such extensive reach and distribution networks that they are assured of receiving a significant portion of overall industry inflows into their funds. Thus, growth in the industry translates into growth for these players.
For instance, in the past 4 out of 5 years, SBI mutual funds have grown faster than the industry growth rate, thanks to the substantial market share they control.
(Source - SBI MF Annual Report)
NFO And New Products
When markets are in a bull phase, NFOs are quite common. Recently, we have seen several NFOs that received much better participation from investors than expected, even surprising the fund houses. NFOs generally help increase a fund house's overall yields, as the NAV during an NFO is slightly higher.
Similarly, other products such as PMS and alternate investment services also help AMCs grow.
Conclusion
The wealth management space in India, particularly the mutual fund sector, is experiencing a significant boom driven by increasing household incomes and changing investment patterns. With the rise in retail investor participation and systematic investment plans (SIPs), mutual funds have become a preferred investment vehicle. SBI Mutual Fund, as the market leader, benefits from its extensive distribution network and economies of scale, positioning it well to capitalize on the industry's growth.
The under-penetration of mutual funds in India, compared to developed economies, suggests substantial room for future expansion. As household savings and incomes continue to rise, the mutual fund industry is poised for sustained growth, making it an attractive opportunity for investors.
Even the inclusion of India in major world indices and upping its weightage, all of this is playing a role in the growth of the overall industry. SBI Mutual Fund is an exciting investment opportunity available in the unlisted markets. It's the largest asset management player in India and still growing at a healthy rate. The macro factors, coupled with company fundamentals are pushing the players in this space to generate good cash.
For this article, we have tried to provide detailed research on the entire sector and SBI FML. However, personal research is essential before investing in such stocks. If you would like to invest in SBI MF, check them out on InCred Money where you can start by investing in just one share as well.
Stay tuned for our next article in the ALTShares series powered by InCred Money where we will be talking about the Solar industry linking them to opportunities like Waaree Energies in unlisted markets. Meanwhile do checkout other unlisted share opportunities on InCred Money.
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