Overview of the Asset Management Industry in India
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ASSET MANAGEMENT VIKRAM BITAN TUHIN HARIT KURIYAN CHAKRABORTY Indian School of Indian School of KPMG Corporate Business Business Finance Overview of the Asset Management Industry in India India. This bears testament to the fact that still some distance from being 100 percent the asset management industry is still in professionally managed, mutual funds relative infancy. At the end of March 2018, are the largest component of India’s asset assets under management (AUM) of mutu- management industry (Figure 1). al funds in India stood at USD 350 billion.*5 Aside from the above mentioned Although the banking sector dominates In- professionally run companies, insurance Introduction dia’s financial asset milieu, holding nearly companies manage massive asset portfo- 70 percent of financial assets,*6 rising in- lios for themselves, comprising primarily comes provide ripe opportunities for the of debt and equity securities. Due to rapid asset management industry to expand technological penetration, the sector, in their pie, which is further bolstered by reg- terms of insurance premium, is expected ulatory tailwinds, positive macroeconom- to grow at an annual rate of 49 percent*8 ndia is expected to be the third largest ic outlook and favourable demographics. to reach USD 280 billion by 2020. As of the economy in the world by the close of The demographic distribution of the end of March 2017, life insurance had the I the third decade of the 21st century,*1 population of India is a major asset – with majority market share of 77 percent, and next only to the U.S. and China. Compared a young and growing population – that was dominated by LIC. Owing to their co- to a relatively muted world average annual was earlier seen as a Malthusian liabili- gross domestic product (GDP) growth rate ty. India’s middle class base is one of the of 3.5 percent since 2012,*2 India’s GDP has largest in the world. The steadily increas- Figure 1: India’s Asset Management grown at an average pace of nearly seven ing number of high net worth individuals Industry Size in 2018 (USD Billion) percent during the same period,*3 making (HNWIs) is also younger in average age it one of the fastest growing economies in than their western counterparts. Also 41 Alternative Investment Fund 43 the world. Concomitant with a growing percent of them have their financial assets economy, incomes have risen and have parked outside of India*7 and a significant led to higher levels of consumption and fraction of these assets could come back Pension 200-250 savings. Gross national savings stood at to India as the “home-bias” characteristic USD 720 billion for FY2016-2017,*4 nearly of developed markets takes place. This tri- 32 percent of the gross national disposable fecta of underserved HNWIs, an expand- income – a very high savings rate when ing middle class that aspires for a better compared with the developed world. financial future, and woefully low pen- Mutual Fund 350 Despite this very high level of sav- etration of mutual funds in India, offers ings, banks and insurance companies, immense latent opportunities for growth. such as the government-controlled behe- The Indian asset management in- moth Life Insurance Corporation of India dustry in 2018 is about USD 550-650 bil- (LIC), are the preferred routes for depos- lion, which is a small fraction of the global Note: Pension includes the AUM of only Employees’ iting financial assets by a majority of indi- asset management industry, and is one of Provident Fund Organisation and National viduals and not the 41 asset management the worlds’ fastest growing. Pension System. Source: Various sources compiled by authors companies that are currently operating in Ignoring pension funds, which are 8 | NOMURA JOURNAL OF ASIAN CAPITAL MARKETS | AUTUMN 2018 Vol.3/No.1 pious cash cycle, these companies are also four percent per annum. With liberalisa- of the assets is heavily skewed towards one of the largest investors in Indian cap- tion, many private players entered into the open-ended. Open-ended mutual funds ital markets. As of the end of March 2017, fray and started offering varied investment account for over 98 percent of all assets the AUM of the life insurance industry products, many of which were tailor-made managed by the mutual fund industry in was USD 497 billion*9 of which 72 percent to a specific investor segment, based on a India.*13 Furthermore, 88 percent of the was parked in fixed income instruments. multitude of factors such as age, risk appe- AUM is divided among debt (38 percent), A large proportion of investors in mu- tite, and sector preferences. As financial lit- equity (36 percent) and liquid money mar- tual funds are institutions – corporations, eracy increased among the masses, so did ket (13 percent) funds, and corporates, banks and foreign institutional investors the propensity to seek out investment vehi- HNWIs and retail investors account for (FIIs) (Figure 2). However, as technology and cles other than bank deposits. The last few almost the entire pie of investors.*14 the internet have made it easier than ever to years, from 2015 to 2018 in particular, saw The growth in closed-ended funds invest, the proportion of individual inves- tremendous inflows into mutual funds. has stalled following Association of Mu- tors is expected to increase in the future. Growth in mutual fund investment in India tual Funds in India (AMFI) directing fund outpaced that in the rest of the world. *11 houses to cap upfront commissions at one Such growth has likely come about percent. This, coupled with subpar perfor- due to the interplay of structural reforms, mance as compared to their open-ended regulatory push and favorable macroeco- peers, has led to a decline in the launch of nomic conditions. The last quarter of 2016 new closed-ended schemes since 2015.*15 Evolution of Asset saw demonetisation due to which an un- precedented amount of currency in circu- Pension funds Management in India lation was declared null and void. As nearly India’s pension system is a complex USD 230 billion of defunct currency made web consisting of multiple options with its way into the formal banking network, varying eligibilities. Civil servants and bringing a sizable segment of the popula- government employees were awarded tion under the scanners of the government, pension benefits in 1881 under the Roy- new avenues of investments that save on al Commission on Civil Establishments Mutual funds taxes and generate high returns, gained Act.*16 The Government of India Acts of The mutual fund industry forms the traction. Returns from traditional avenues 1919 and 1935 made further provisions. lion’s share of the entire asset management such as gold and real estate, that used to wit- Under these schemes, entire pension industry in India and has come a long way ness large cash flows, waned post-demone- expenditure was charged in the annual today since its humble beginnings over 50 tisation. As if on cue, mutual funds saw a revenue expenditure account of the gov- years ago.*10 Unit Trust of India (UTI) was veritable jump in inflows and penetration, ernment, thus in a way, cross-subsidis- established in 1963 through an act of parlia- within a year after demonetisation.*12 The ing government employees over private ment to operate under the aegis of the Re- period also saw a long bull run in equity ones. Private workers had limited options serve Bank of India (RBI). In 1964, the first markets as mutual funds, now flush with in terms of pension coverage. However, mutual fund product was launched and cash, poured money into equities. this changed with the formation of the until 1987, when a wave of public sector un- Mutual funds generally offer three Employee Provident Fund Organisation dertakings (PSUs) jumped onto the mutual distinct categories of products: closed-end- (EPFO) in 1952 and the launch of the Pub- fund bandwagon, UTI managed a paltry ed, open-ended and exchange traded lic Provident Fund (PPF) in 1968. USD 1.22 billion. Economic liberalisation funds (ETFs). While the distribution of EPFO offers three schemes: (i) Em- in the early 1990s saw India shedding the fund schemes between closed- and open- ployee Provident Fund (EPF), 1952; (ii) shibboleth of the “Hindu rate of growth” by ended categories is slightly skewed to- Employees’ Deposit Linked Insurance which growth stagnated at around three to wards the closed-ended, the rupee value Scheme (EDLIS), 1976; and (iii) Employ- ees’ Pension Scheme (EPS), 1995. While EPF and EPS invest in a variety of capital Figure2: Breakdown of Mutual Funds by Investor Type market instruments, EDLIS is primarily an insurance scheme. PPF is guaranteed Banks/Financial FIIs 0.6% by the government and the corpus is in- Institutions 2.1% vested on various government schemes and programs.*17 The National Pension System was launched in 2004 by the Government of Retail Investors India in order to de-emphasise defined 22.7% benefit pension plans and move to de- Corporates fined contribution plans. The National 47.0% Pension Scheme (NPS) and EPFO employ professional fund managers. High Net Worth Alternative investments Individuals 27.6% • Private equity (PE) and Venture capital (VC): The need for VC was Note: As of June 2017. first highlighted by the government Source: India Brand Equity Foundation committee on development of small Overview of the Asset Management Industry in India | 9 ASSET MANAGEMENT and medium entrepreneurs (Bhatt ties. However, the Indian hedge at least 90 percent of its net distrib- Committee)*18 in 1972. In 1973, the fund industry began only in 2012, utable cash flows on a half-yearly efforts of the Indian government to after the introduction of the AIFs basis.*25 Further, the REIT assets provide risk capital led to the for- regulations by SEBI.*22 They were are mandated to be situated within mation of the Risk Capital Founda- regulated under the Category III India and cannot include hospitals, tion.*19 In 1986, the Technology De- that included alternative funds that hotels, and other infrastructure velopment Fund was formed from a engage in the use of leverage and such as special economic zones.