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Mumbai: International and domestic financial firms are queueing up to launch mutual funds in India, lured by attractive fees and rising valuations in Asia's third-biggest economy, and to counter the impact of a sharp fall in broking fees.
At least six brokerages are awaiting regulatory approval to break into the 33-member Indian funds industry, assets of which are forecast to more than triple to $520 billion by 2015, according to the Boston Consulting Group.
Players are tapping into rising savings as the economy booms and where double-digit salary hikes are common in sectors such as real estate, information technology and financial services.
For many local brokerages which already offer portfolio management to wealthy clients, and have nation-wide networks, diversifying into the funds business is a natural move.
"I see this move into asset management as a way to get hold of stable source of earnings," said Naveen Tahilyani, partner at McKinsey & Company.
The Indian fund industry, worth $141 billion, expanded more than 60 per cent last year, attracting global players such as South Korea's Mirae Asset, American International Group and JP Morgan.
Local brokers including Edelweiss Capital, Geojit Financial Services and India Infoline, and UBS and Japan's Shinsei Bank are among more than a dozen waiting in the wings to jump in.
Firms command higher margins in India's nascent funds industry, in which investors ploughed 4.8 per cent of household savings in 2006-07, up from 0.4 per cent two years ago, central bank data show.
"Industry operating profit, as a percentage of average asset under management, is 32 basis points in India compared to 12 bps in the UK and 18 bps in the United States," McKinsey said in a report last month.
Despite sliding stock markets, Indian equity funds collected a net 212.1 billion rupees ($5.3 billion) in Jan-Feb, nearly two-thirds of net monthly inflows mopped up in calendar year 2007 and more than three times the corresponding period the previous year, data from the Association of Mutual Funds in India show.
Bull run
This followed a five-year-old bull run in Indian equity markets, fuelled by record fund inflows and strong corporate earnings though markets have taken a beating this year.
"The broking business has its ups and downs," said Saurabh Nanavati, chief executive of Religare Aegon Asset Management, which plans to launch its first fund by September. "Asset management helps to smoothen the earnings curve."
Religare Aegon is an equal joint venture between Religare Enterprises and Dutch insurer Aegon
Indian stocks rose 47 per cent in 2007, recording their sixth straight year of increase and strongest growth in four years on record fund inflows and strong corporate earnings. But the main index gave back 23 per cent in the first quarter this year as part of a global market rout.
Valuations of asset management companies are increasing. In March, Standard Chartered sold its Indian asset management business to Infrastructure Development Finance for $205 million.
This valued the firm at about 6 per cent of its assets, higher than 4 per cent struck by Swiss bank UBS AG last year in a deal that was later called off.
"The valuation game is I think playing out very strongly in India," said Ashvin Arora, director of the OptiMix division of ING Investment Management.
But he noted barriers to entry were increasingly high. Boston Consulting Group estimates a firm would need at least $2.5 billion under management to break even, twice as much as was needed two or three years ago.
Of India's 33 fund firms, only 17 were managing assets in excess of $2.5 billion at the end of February, data from fund tracker ICRA show.
South Korea's biggest mutual fund firm, Mirae Asset, launched its first Indian fund on Feb 11, the day the local fund unit of Morgan Stanley launched a fund after a gap of 14 years.
The rampant poaching and soaring pay in a sector where talent is scarce has however delayed the launch of new operations.
Distribution is seen as key to India's fund industry, which is led by a unit of Reliance Capital, and ICICI Prudential. Both firms have branches in more than 100 cities.
McKinsey estimates top eight Indian cities account for three-quarters of the retail mutual fund assets, and local brokerages with a greater reach could bring in more investors.
"The retail segment will be the largest contributor to the growth of the asset management industry in India," it said, adding it expected 35-42 per cent compounded annual growth over the next five years.
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