India’s equity indices have averted the pandemic, with retail investors grabbing stocks with both hands. The major beneficiaries have been fund houses whose assets under management (AUM) have increased. But there is more here than meets the eye.
According to Amfi data, the overall AUM of fund houses grew by 3.4 per cent in August. Within that, Equity Mutual Funds registered a faster growth of 5.4% in AUM. This includes equity-linked savings schemes that offer tax benefits and index funds. Since the coronavirus pandemic last year, fund houses have seen their equity AUM rise by over 20% and overall AUM by 11%.
Fund houses make money through the distribution of mutual fund schemes that enable individuals to make large and bite-sized investments in the capital market. Ergo, AUM growth is crucial for increasing the profitability of fund houses.
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In the wake of the pandemic, growth has not been a problem and thus profitability has far exceeded investor expectations. In addition, net fund offers have grown rapidly and fund managers have been able to attract more retail clients.
The Systematic Investment Plan (SIP) flow is different. The increasing share of SIP inflows in the overall inflows is a sign of stability for mutual fund houses. Analysts say SIP inflows are at record highs and are likely to continue rising. It promotes retail participation in the markets through fund houses.
“This has strong potential for earnings growth in FY22,” analysts at ICICI Securities Ltd wrote in a note.
No wonder, stocks of listed fund houses like HDFC Asset Management Company Ltd, Nippon Life Asset Management Company Ltd and UTI Asset Management Company Ltd have shown huge gains since the pandemic. Nippon shares are up 81% from 2020 lows and HDFC AMC shares are up over 50%. Listed in October last year, UTI AMC is trading at a premium of 114% to its issue price. Analysts at ICICI Securities have upgraded the earnings estimates of these fund houses for FY12 and FY13.
But what also matters is the mix of schemes that get the most inflows and how the fund house is able to keep costs under control. An increase in the equity inflows share bodes well for the yield of a fund house. To that extent, August may not be a good month on the whole as redemptions in equity schemes have also gone up.
That said, the rise in equity AUM is encouraging for the sector. The fall in the share market share of HDFC AMC has been a drag on the valuation of AUM.
Another element is cost. This will be clear when fund houses announce their September quarter results later. HDFC AMC has the distribution load when it comes to cost, but Nippon has been able to keep it under control, as demonstrated in the June quarter.
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