HDFC Mutual Fund is one of the top asset managers in the mutual fund industry and yet, surprisingly, spent nearly 4%-5% of the total assets of Morgan Stanley to increase its own asset base by a meagre 3%
 

Morgan Stanley Mutual Fund is selling around Rs3,300 crore of assets to HDFC Mutual Fund which would mean just a 3% addition to HDFC Mutual Fund’s assets under management (AUM) of over Rs1 lakh crore. In the current acquisition, the mutual fund schemes of Morgan Stanley Mutual Fund that would merge with schemes of HDFC Mutual Fund are: Morgan Stanley A.C.E, Morgan Stanley Active Bond, Morgan Stanley Gilt, Morgan Stanley Growth, Morgan Stanley Liquid Fund, Morgan Stanley Multi Asset, Morgan Stanley Short Term Bond and Morgan Stanley Ultra Short Term Bond.
 

Why would a HDFC Mutual Fund, a fund house with the highest assets in the industry, acquire schemes of a smaller mutual fund house which makes adds an insignificant 3% to HDFC Mutual Fund’s assets under management? This would make business sense only if the cost of acquiring new investors would be more than the cost of acquiring the schemes of another fund house. Is it that even a top performing fund house is probably finding it difficult to acquire new investors?
 

Last year Fidelity Mutual Fund sold its assets to L&T Mutual Fund. Morgan Stanley Mutual Fund is the second fund house to sell off its mutual fund asset this year after Daiwa Mutual Fund sold its assets to SBI Mutual Fund for an undisclosed amount. With heavy outflow of assets over the recent years, many mutual fund houses have found their businesses unviable. The fact remains that investors are not interested in investing in mutual funds due to flawed products, flawed methods of selling, flawed regulation and huge costs to acquire new investors.
 

Only three mutual fund schemes of Morgan Stanley Mutual Fund have a corpus over Rs50 crore. Morgan Stanley Growth, an equity scheme, launched nearly two decades back, has a corpus of just Rs68 crore. The other two are Morgan Stanley Liquid Fund and Morgan Stanley Ultra Short-Term Fund. What is clear is that the Morgan Stanley Mutual Fund has been struggling to increase its corpus, having made a half-hearted push a few years ago to increase its range of funds.
 

According to an article published by Economic Times, HDFC Mutual Fund is said to have paid Rs150-170 crore which works out to 4.5% to 5% of the total assets of Morgan Stanley Mutual Fund. Considering fund houses were paying as much as 6% commissions to distributors for getting high ticket value investments for Rajiv Gandhi Equity Savings Schemes, HDFC Mutual Fund would have probably found this route of asset acquisition a cheaper alternative. (Read: High value applications perverting RGESS, while SEBI remains mum)
 

To get noticed by investors, mutual fund houses would need to pay high commissions to distributors to promote their mutual fund schemes and more so, after the ban on entry load in August 2009 that killed all incentives to sell mutual funds. Three years back we had reported that SEBI might have shot the mutual fund industry in the back by banning entry load without thinking through the implications. (Read: Mutual Fund turmoil: Can SEBI be held accountable?). With the banning of entry load, the distributors’ margins have been squeezed and they have been exiting the business of selling mutual fund in droves. Mutual fund houses had their hands tied, because if they had to increase commissions for distributors they would have to pay from their own pockets. In the past few years, there has been a huge outflow of equity assets, while the markets have remained volatile and flat. With depleting mutual fund corpuses, many mutual fund houses would have found the business unviable.
 

According to Birla Sun Life Mutual Fund, the fifty years old Indian mutual fund industry is fraught with a number of challenges. A press release stated that the penetration of mutual funds in India (as measured by the AUM/GDP ratio) remains low at 4.7% as compared to 77.0% in the US, 41.1% in Europe and 33.6% in the UK. Greatly under-penetrated, the industry comprising over 40 mutual fund companies today collectively manages 2.5% of Indian household savings. The right kind of awareness among investors about mutual funds, the diversity and benefits of its offerings remains a challenge. Being an advisory product which is largely distribution driven, stagnation in growth of distributor base also acts as a limiting factor.
 

Over the past year the SEBI came out with a slew of reforms in order to drive more retail participation. However, these new policies have had a marginal impact on mutual fund inflows. For years SEBI failed to pay heed to the voices of investors. Under the last two chairmen it did not pay heed to market players either. It has taken a trip on its own, at the cost of hapless retail investors and the mutual fund industry.