While the total assets of the Indian mutual fund sector rose by a hefty 26pc in 2014, breaching the Rs11trn-mark (about $176bn) for the first time, international fund houses are gradually exiting the sector, selling off their assets to Indian funds.

Three international players — Morgan Stanley, ING and PineBridge — sold their mutual fund businesses to Indian fund houses in 2014 and two others are in talks with both domestic and foreign asset managers to sell off their stake.

The last few years have seen several international firms exit the Indian mutual fund sector. They include Standard Chartered Bank, which sold its mutual fund to IDFC in 2008 and Fidelity, whose mutual fund was bought by L&T Finance in 2012.

Last year, HDFC Mutual Fund bought Morgan Stanley’s fund business, while Birla SunLife bought the assets of ING Mutual Fund. Kotak Mutual Fund bought over PineBridge Mutual Fund in September.

Of course, not all foreign players are exiting the market. Some, like Nippon Life Insurance, a Fortune 100 company and the seventh-largest life insurer in the world, last month decided to increase its stake in Reliance Capital Asset Management (RCAM), part of Reliance Capital. The Japanese life insurer had acquired a 26pc stake in RCAM in 2012 and has now decided to raise it to 49pc.

According to Sam Ghosh, CEO, Reliance Capital, Nippon Life’s expanded role in RCAM will accelerate its growth, reach and performance. The Japanese company will be investing $108m in the first tranche to acquire an additional stake of 9pc, and will raise it by another 14pc in the second tranche.

RCAM is the largest asset manager in India, managing about $36bn (as on September 30, 2014) across mutual funds, pension funds, managed accounts and offshore funds.

Another leading foreign fund house, Franklin Templeton AMC of the US — which began operations in India in 1996 — is learnt to be in acquisition talks with Deutsche AMC. The German fund manager set up its India operations in 2002, and has assets under management (AUM) of about Rs226.7bn, making it the 13th largest fund house in the country.

Franklin Templeton has an AUM of Rs636.43bn, making it the seventh-largest fund house. While both have refused to comment on the acquisition talks, if the deal goes through, Franklin Templeton could emerge among the top five fund houses in India.

Another leading American financial institution, Goldman Sachs, is also believed to be in talks with WisdomTree, a US-based exchange-traded fund, for the sale of its Indian mutual fund assets. Goldman Sachs had acquired Benchmark Mutual Fund Management Company’s assets in March 2011, making its foray into the Indian mutual fund sector.

There are 43 mutual fund houses in India, which manage AUMs of Rs11.06trn. But the top ten control more than 80pc of the assets. The smaller players, including global majors, have been sustaining losses in recent years, forcing many of them to exit the sector.

Surprisingly, the foreign mutual funds are selling their assets at a time when the Indian equity markets have rallied handsomely over the past few months. In 2014, for instance, the Indian equity markets rose by more than 30pc in dollar terms.

But the top mutual fund players — HDFC MF (with Rs1.5trn in AUMs), ICICI Pru AMC (Rs1.36trn), Reliance MF (Rs1.26trn), Birla, UTI and State Bank of India (SBI) — with their vast network of offices are snapping up all the new business in the sector. Three of these mutual funds are owned by the country’s top banks — HDFC, ICICI and SBI, who have a vast network of branches across India.

One reason for the rush of exits by international players is the opportunities that they see in their home markets, especially the US. Many of the global firms are expected to boost their capital to meet the new norms.

Analysts say that many of the foreign players are unable to match the top Indian mutual funds in terms of distribution, brand recognition and aggressive retail sales strategies. International funds have been catering to the needs of institutional buyers and are focused only in the metros.

But Indian fund houses have been tapping the wealth in tier-II and tier-III cities, drawing millions of Indians into the equity and debt markets. International funds also have a high cost structure, which results in margins being squeezed.

The Securities and Exchange Board of India (SEBI), the capital market watchdog, has also been tightening the norms, making it tougher for asset managers to charge high fees. A few years ago it banned entry loads, preventing funds from charging a fee to investors buying into schemes.

Recently, SEBI raised the net worth requirements for mutual funds from Rs100m to Rs500m, discouraging smaller players from entering the sector. Some of the existing players are also seeking to quit the business because of these norms. Analysts expect a consolidation in the sector, which is currently crowded with 43 fund houses.

The market regulator is now planning to slash the ceiling on expenditure by mutual funds from 2.5pc of their AUMs to 1.5pc, reducing the high commissions that they pay brokers to attract business.

An advisory committee of SEBI has suggested that the total expense curb be lowered to 1.5pc. Besides brokerage, the expenses also include fund management fees and registrar and transfer agent fees.

SEBI is also considering making it compulsory for mutual funds disclose the commissions they pay every year. Such data would have to be mentioned on their web sites and also those of the Association of Mutual Funds of India.

Intermediaries including brokers and distributors generate about two-thirds of the business for mutual funds. The regulator also wants to crack down on mis-selling of mutual funds.

Many banks set high targets for their employees, asking them to focus on selling specific funds to customers. Banks are supposed to sell all mutual fund schemes, but many mutual funds aggressively promote their schemes and banks end up selling only those to their customers.

Published in Dawn, Economic & Business, January 19th , 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play