Don’t expect too many AMCs to come to market to raise money

HDFC Asset Management Company, which runs HDFC Mutual Funds, has just had an extremely successful stock listing. On the first day after listing, the stock closed up 65 per cent. While the promoter, HDFC, must be wondering whether it had underpriced the issue and thus left money on the table, the price appreciation does indicate an impressive demand for the stock.While I hold no strong view on whether this particular stock is a good investment or not from here onwards, I’ve observed over the last few days that a lot of casual equity investors do not appreciate the unique business model that mutual fund companies have. Coincidentally, just the day HDFC AMC listed, I came across an (unrelated) tweet by the American financial commentator Morgan Housel which brought home the quality of asset management companies’ businesses. Wrote Housel, “Investment management fees might be one of your household’s top budget line items, but you don’t realise it because you pay in autodeducted basis points instead of an invoice.”To test Housel’s theory, I cornered a friend who has been investing in mutual funds for more than two decades and whose investments have grown to around Rs 85 lakh. “How much do you pay for fund management services,” I askedRs “Nothing,” he said. When I told him that he actually paid around Rs 20,000 a month, he was shocked. Housel’s conjecture was absolutely true. At Rs 20,000 a month, fund management is literally the largest single regular expense that my friend’s household makes!I won’t go into the question of whether Rs 20,000 a month is too much for managing Rs 80 lakh. That’s a topic for another day. However, consider the facts: A middle-class household is paying about 15 per cent of its total monthly expenses for fund management, and does not realise it’s doing so, and the amount is rising, and it will continue to pay this basically forever. All this means that running an AMC can be a great business, and quite probably, buying the stock of good AMCs at a reasonable valuation could make you much more money than investing in those AMCs’ mutual funds!But seriously, that makes it sound like mutual funds are not a good way of investing. Nothing could be further from the truth — mutual funds are by far the best and the most suitable way of investing that is available to the Indian investor. Despite the cost (and I firmly believe that cost is on the way down), a lot more Indians are going to find it worthwhile to be investing a lot more money into mutual funds in the years to come. There might be a lot of noise around mutual funds, but at the end of the day, only around 2-3 per cent of households have any substantial investments in mutual funds. I know that much higher figures of up to 10 per cent are quoted but based on my experience, I’m unable to believe that. Of households who make discretionary financial savings, maybe it’s 10 per cent.Thus, the other part of this story is the growth potential. Growth will come to all parts of this equation. This 2-3 per cent will keep growing, as will the actual amounts invested by the existing investors, and as will the value of the money invested.However, I wouldn’t expect too many AMCs to come to the equity markets to raise money. In fact, that’s the other part of why this is such a great business — there simply isn’t any particular need for too much capital.The two listed AMCs that we have both went public not because they needed capital but as a way of promoters’ raising some money and for liquifying employee stock options.In combination with everything else, this short supply in AMC equity will itself be good news for investors.(Author is CEO, Value Research) 65291150 65300524 65331093

from The Economic Times https://ift.tt/2M5t8qn