“Mutual funds are no longer profitable”; “It is not worth being in the life insurance business”

– you have heard this and variants of this from the ad driven media, right?

Well the truth is not very close to this. Let us take the case of Hdfc Mutual fund. Given the huge AUM already under its belt, it has an annual income in the region of Rs. 350 crores. Not bad at all, right?

What about the life insurance companies? Well, I do not have authentic AUM figures…but let us say Hdfc Life insurance has about Rs. 40,000 crores and Icici Prudential has about Rs. 80,000 crores. In case of the life insurance business, assuming a 1.5% asset management charges, these companies have about Rs. 600 crores and Rs. 120 crores.

The best part is that the figure will keep on growing. Why? simply because people have started believing that unit linked plans are for longer period, while some have forgotten about it. For those people for whom it is going through a standing instruction plan – they may just be too lazy to stop it!

Also life insurance companies make a greater effort to RETAIN the investor unlike a mutual fund. MFs do not even know why you are withdrawing…let alone making an attempt to stop you.

Why do you think are the life insurance companies and mutual funds cribbing about profitability?

Simple they are not as profitable as their big brother – commercial banks!!

 

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  1. Subra Sir

    Any idea what the logic of reducing the asset management charges of mutual funds with the increasing size of the the fund. Personally i am happy but isint it bad for the industry and growth.

    Instead why no one propose lower rates for SIP and its time length….which could have a positive/ reward for performing management and rewarding the real investors too.

  2. no way how Amfi will allow charges to go down. If anything it will go up. All expenses are not dependent on AUM. So if rent, audit fees, salaries,..are expenses of a fund HOUSE (not fund scheme – which are anyway being charged to the scheme) why should it increase with increasing AUM – that is the logic. If the fund house can be pushed to charge less, they should be. Do not worry MF business is extremely, extremely profitable.

  3. On this article, I have to disagree with you Subra. Especially because your example is just as inappropriate. Yes, if we r taking the example of largest player in MF business, no doubt the industry will seem profitable. Because the costs dont go up proportionately with AUM while the revenue does. So the largest few will no doubt be making decent money. Similarly, I would want to ignore the bottom few players who will be not be making money (just as it happens in so many other businesses, financial or otherwise). But what about the middle players. Say AMCs with AUMs of between 5,000crs and 20,000 crs. How profitable are these, given that largest chunk of these would be Liquid and Ultra short term funds with expenses of around 0.10% to 0.40%? Would want to see you analyse the profitability based on this and post the brokerage commissions and costs.

  4. Ok Pi. Value adding financial service companies get Shylockian returns, others make enough money to survive.

    If we had 43 auto manufacturers how many would be profitable?

    Banking is a great biz – everybody from SBI to Pi Pvt Bank Ltd. ALL make money.

    if you ignore the bottom 36, all are making money, are they not?

  5. Right. Thats why I did not question ur logic on banks and even on insurance companies. But on the AMCs, when I put a filter of 10,000 crs AUM, I have already filtered out bottom 75% players in the AMC industry. So I would believe that the remaining will be comprised primarily of MFs who have been able to add some value and hence have reached middle size. Or are u saying ‘Be in the top 5 or die’. Such oligopolistic scenario will ensure that we would still have been driving around in an ambassador at a much higher price, to quote from ur auto example.

  6. Oligopoly? Show me ONE fund house which has guts to launch a diff looking product or the guts to have unit holder meetings?

    You think they dare let the CIO meet the end investor? NO. Very little value add…so go back to the big 4 or 5.

    Many funds underperform…the index..frankly not enough value add or innovation or..AND NEVER good service…:)

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