Mutual funds face multiple headwinds, stocks disappoint

Mumbai: Rising competition for share of equity assets, outflows from long duration debt funds to passive funds, and higher wage costs have led to lower profits for asset management companies in the June quarter. Analysts said assets under management have increased but profitability has been under pressure, which has put a lid on gains in their share prices after the recent underperformance.

Assets under management of the mutual fund industry as on June 30 rose 8.45% to ₹36.98 lakh crore from the same period a year ago. But profits of listed mutual funds have shrunk. For instance, HDFC AMC's net profit slipped 9% to ₹314.2 crore compared to the previous year. The other three listed asset managers saw a higher fall in profits. At Nippon India Life AMC, net profit dropped 37% to ₹114.1 crore, while ABSL AMC's profit fell 34% to ₹102 crore. UTI AMC's profit after tax fell 39% to ₹94.4 crore.

With the stock markets subdued between April and June and the Securities and Exchange Board of India barring fresh product launches, AMCs have been competing for assets in the equity oriented mutual fund space.

"AMCs have been incurring an elevated level of trail fees and marketing expenses, largely on account of the rising competitive intensity in a soft flows environment," said Krishnan ASV, institutional analyst - BFSI, HDFC Securities.

Rising interest amongst investors in the passive space has led to Return on Equity (RoE) for AMCs shrinking. While an AMC can charge 75-100 basis points in an actively managed equity fund, in a passive fund, it charges 15-30 basis points.

In the debt space too, as interest rates rose, many investors took a hit, leading to a flight to safety. Investors moved away from long duration funds to liquid or ultra-short term funds, or target maturity funds. In these funds, post expenses, the asset manager's fee is 7-8 paise, as compared to 30-40 basis points in actively managed funds.

"When flows into passive funds are higher, whether debt or equity, it results in shrinking yields. Right now, the AMC industry seems to be heading towards a race to the bottom as far as blended yields are concerned; and the worry is that passives are only 20% of the overall industry AUM right now, which implies there is more yield destruction ahead," said Krishnan.

Lower margins have led to stocks correcting sharply over the past one year. HDFC AMC is down 32%, Nippon India Life is down 30% and UTI AMC is down 33.4% in the period. Aditya Birla AMC, which did an IPO in September 2021, is down 41% as against its IPO price. The Nifty 50 has gained 7.1%.

While White Oak Capital recently launched its first equity scheme, entry of several new players like Zerodha and Bajaj Finserv have led to a sharp rise in competition which has led to rise in asset managers' salaries.

"Higher staff cost due to competition amongst AMCs, PMS and AIFs coupled with entry of new players has hurt margins and led to lower return on equity," said Kranthi Bathini, equity strategist, WealthMills Securities.