Fintech startups in India await SEBI approval to become mutual fund AMCs

After months of speculation, PhonePe has joined a growing list of fintech companies awaiting approval from SEBI to set up their own asset management companies (AMCs).

PhonePe’s app follows the market regulator’s relaxed rules on setting up AMC, which it notified in 2020 “to facilitate innovation and increased reach”.

From fund distributors to fund managers

The Walmart-owned payment platform isn’t alone in its mutual fund offering: Zerodha plans to launch its own programs this year. Niyo and Groww also watch space.

Many other new and established players are looking to launch new programs in the short term. These include Bajaj Finserv, Navi Technologies, Samco, Angel One, Old Bridge Capital Management, PB Fintech and Helios Capital Management PTE.

Fintech companies getting into financial services are just a natural and explainable leap. PhonePe, for example, entered the space in 2017 when it started allowing users to buy gold as an investment. Its peers, from Paytm and Kuvera to Zerodha and Groww, are already branching out into wealth management products.

That said, the entry of these companies into the Lcr38 ($505.84 billion) mutual fund industry as AMCs managers as opposed to just distributors is a big problem. Not just for these new era tech startups themselves looking for a slice of the pie, but for the mutual industry as a whole…

The Indian Mutual Fund Industry: A Brief Overview

Currently, the country has 45 AMCs and around 1,500 schemes in the debt, equity, hybrid, ELSS and ETF segments. In August 2021, the assets under management (AUM) of these plans stood at 36.59 Lcr (473.76 billion dollars).

FOR YOUR INFORMATION: If you’re new to mutual funds, you might want to check out our 10 Point Beginner’s Guide. Also watch out for those pesky hidden costs!

Securities market penetration in India is woefully limited, at just 6.5%, and concentrated in the wealthy and educated pockets of the big cities. In comparison, this figure for the United States was 55% (in 2020).

Obviously, the segment is woefully untapped. This is a concern SEBI may have had in mind at the end of 2020, when the regulator relaxed the rules for new entities with “technology solutions” to set up AMCs. Although it stipulated new conditions – such as the 100cr ($13.31 million) net worth requirement – ​​it removed the five-year financial services experience requirement, virtually opening the door to a multitude of new players.

Today, the street view seems to be that fintech could do for mutual funds what discount brokerage did for market transactions. This essentially amounts to democratizing access and modernizing a market that is still under-penetrated.

New kid on the block MF

But why are fintech companies turning to mutual fund management in the first place?

One The reason may be that the industry itself is growing rapidly (as seen above) and these players want to capitalize on that growth.

the second The reason for this may be that the COVID-induced stock market investment boom could run out of fuel as the economy returns to some level of normality (Omicron notwithstanding). Investor Appetite for DIY Investments May Diminish; as such, mutual funds offer a new way to continue to capitalize on the growing financialization of savings and capitalize on the growing retail investor base.

the third The factor may be the low margins and high customer acquisition costs (CAC) in the hyper-competitive and cut-throat fintech and wealth-tech space, which have made balancing without diversification somewhat of a task. arduous. With this in mind, moving from fund distributor to mutual fund operator is a market + margin expansion game, which then becomes more of a when than Why.

Fintech in the fray

Fintech companies are already making their mark in the industry. The AUM of fintech distributors has jumped 2.4x between FY20 and FY21 in the equity segment at ₹27.463cr ($3.66bn). During this period, SIP registrations also increased by 60% while debt AUM more than doubled to ₹5,099cr ($678.76m).

Once these actors start rolling out their own programs, ceteris paribusthese numbers can be expected to increase further.

What is driving the growth of fintech in the mutual fund segment? Largely the same drivers that have driven Indian markets in recent years: (1) increased digitalization and (2) an influx of young and entry-level investors.

Times are changing’

Financial Technology the platforms are naturally very internet-savvy and geared towards gadget-loving customers. Many of them also support robo-advisor features, offers programs from many fund houses, provides investment explanations and advice, and charges little to no commission (at least on direct plans and at least for now).

Then there is the nature of their target clientele: budding young investors from the burgeoning middle class. Those Traders “Robinhood”, fueled by the discount brokerage boom, the rush to make a quick buck and pandemic-induced boredom at home, have changed the very nature of Indian markets over the past couple of years. In doing so, they contributed to a relentless stock market rally and the biggest IPO year in market history.

(However, whether they are also partly to blame for soaring valuations and increased market volatility is a different debate. That said, the increased participation of individuals in a stock market that was once dominated by HNIs and businesses is a welcome trend.)

Now, for the new investor, investing in stock marketing can be a daunting proposition, given the complications and risks involved. Investing in mutual funds, on the other hand, is safer, easier and less convenient. Moreover, with relatively more guaranteed returns.

Ultimately, if you are a young, enterprising person who spends most of your time online, investing through fintech platforms would be a more relevant experience compared to browsing or connecting to traditional AMCs and brokers.

FOR YOUR INFORMATION: Significantly, fintech participation in the mutual fund space has been accompanied by an explosive expansion of the fintech sector itself. At the end of June, there was would have 2,174 fintech startups in the country. That’s an increase from just 454 in 2015.

Risk, your name is investing

Obviously, investing is a risky business, whether you do it through traditional brokers or an Android app. Especially for the rookie investor, who may have entered the game in the 2020-21 bull run (and now may be too comfortable in a possible bubble). Markets are volatile things, and unless handled with caution, the costs of delays or bad luck can be, well, costly.

Investing in Fintech mutual funds carries many of the same risks as the traditional type, such as security of financial data and hidden costs. Additionally, most of these fintech companies have only been around for a few years – their future prospects are, for lack of a better phrase, “subject to market risk.”

It should also be noted that original/personal research is paramount: influencer recommendations should not be taken at face value + a robo-advisor is only as good as the algorithm it is based on. Don’t be seduced by buzzwords such as “Big Data analytics”, “machine learning” or “artificial intelligence”.

The essential

Fintech-issued mutual funds are the go-to tech solutions for a tech-savvy generation. The segment is new, exciting and promising. Case in point: Over the past fiscal year, even though equity funds saw net outflows, fintech players continued to benefit from an increase in assets.

It is also an ever-changing scene. The new funds seem to favor passive investing (ie when a program tracks a market index). It may be because these programs are easier to understand, easier to manage, and easier to sell. They also have lower operating expenses, which justifies low total expense ratios (TER). As regulations and participation catch up and the industry matures, more fund diversification could be in sight.

FOR YOUR INFORMATION: It might also be interesting to see if this new trend will elicit an antitrust response. After all, if and when Zerodha releases their own schematics, they would be sharing space with other non-Zerodha schematics on… Zerodha. Essentially, a distributor markets its own products alongside those of its competitors. Amazon sadly tried this, and regulators were more than impressed.

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Dolores W. Simon