Post the 2008 credit crisis, many foreign sponsors of mutual funds have exited India citing reasons such as ‘re-focus' on their core businesses. Fidelity's case is different though. The US fund house's core business is mutual funds and its decision to exit can only mean that it finds the country's mutual fund industry unattractive.
Lack of scale
There could be two key reasons for Fidelity's decision. First, lack of scale. Despite being in India since 2005, Fidelity's Indian arm ranks 15th among fund houses by asset size. In fact, its assets managed of Rs.8,800 crore make it not much bigger than the late-comer Axis Mutual Fund (started in 2009).
The largest Indian asset manager HDFC Mutual Fund manages ten times (Rs.88,000 crore) the assets that Fidelity does. The lack of scale makes for poor profitability, evident from Fidelity AMC's losses of Rs.62 crore in 2010-11.
Reach limitations
Two, scaling up in size is quite difficult in the Indian context. In developed markets such as the US, the mutual fund industry has managed to gain scale mainly through pension plans (401k ) and other money being routed into funds via institutions and companies.
In India, the majority of savings or pension money goes into state-managed provident funds or banks. Given that expenses are capped by SEBI (2.5 per cent of assets managed), reaching out to millions of retail investors to build scale is not easy.
The ban on upfront commissions on mutual funds in 2009 and falling commissions on other financial products too has put the agent force in disarray, making distribution reach all the more difficult to attain.
As one of the later entrants to the mutual fund scene in India and without a bank sponsor, Fidelity has probably not had as much success in sewing up distribution deals with banks to leverage their wider reach, as have a few other fund houses.
Businessline Research Bureau
