Mutual Funds: A Tricky Business

There have been a couple of high profile exits from the asset management business recently. First, it was Fidelity that threw in the towel. And then it was Morgan Stanely’s turn. From where I stand, this is how I see it:

  1. The Mutual Fund business is all about accumulating Assets Under Management (AUM.)
  2. The breakeven is around Rs. 10,000 crore in AUM.
  3. Most investors focus on absolute returns so “beating a benchmark” is not rewarded with more flows.
  4. It is a distribution game. The fund house with the widest distribution network wins.
  5. The product is sold, not bought. Given the plethora of choices in the market, the average investor usually has no clue as to what is best for him. Schemes are sold on the basis of trust between the agent and the investor.
  6. The SEBI killed the distribution network by abolishing the entry load.
  7. The winners were the fund houses who had paid employees who could convert footfalls into sales.

LiveMint’s analysis back in Feb 2012:

Sources:

  • A cautionary tale of Morgan Stanley’s mutual funds in India (ET)
  • Morgan Stanley: Quit India (MoneyLife)
  • Fidelity’s exit, a slap on SEBI’s face (MoneyLife)
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