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Lessons from the Indian Mutual Fund Industry - Part 1

Posted on: 04 Jun, 2023

Last month I traveled to India after almost 5 years. I flew to Mumbai first and then to Kolkata before returning. It was originally not a business trip but I decided to meet with some companies to learn from them. I managed to meet a number of asset management companies, a private equity firm, and also one family office. What India has achieved in its financial sector is truly amazing. Bangladesh doesn't have to recreate the wheel to reach the same level of success. It is possible to achieve all of that in a lower time frame but only with the right 'intent'.

Let's start with the asset management industry. The Indian mutual fund industry AUM (assets under management) is roughly $500bn. The portfolio management service is another $80bn and alternate investment funds may also be another $80bn. In contrast, the Bangladesh mutual fund industry is around $2bn. The other two are too small to even mention.

GDP per capita for India is similar to Bangladesh and the population is perhaps 8x larger. That implies an 8x larger economy also. Yet the mutual fund industry is 250x larger. The difference is unimaginable. I have met with fund managers who managed roughly $8mn in 2013 and now manage $4bn. That single fund manager's AUM is larger than Bangladesh's whole industry.

What helped India make this giant leap?

There could be many factors. But three clear ones came out in almost every meeting we had and probably explain 90% of the success.

1. Regulators protecting the investors: Service providers are absolutely scared of both SEBI and RBI. Both these organizations (especially the former) have a relentless focus on protecting the investors. In the world of finance, the role of the regulator is probably the most important determining factor. When the regulator does its job well people get confidence and vice versa.

2. The mutual fund association working together: India shares similar cultural traits as Bangladesh where ownership of land is very popular. Gold is also a big asset class. When promoting a new product as a mutual fund, the asset managers went on a massive joint marketing campaign (mutual fund sahi hai) to promote the asset class itself first. This investment is paying back in leaps and bounds and the covid and post covid period saw massive growth in the capital market participation.

3. Quality of talent: Indian education system is quite a bit superior to Bangladesh. In addition, they have been able to make an environment where experienced NRIs have come back to India with their accumulated knowledge of working in more sophisticated markets. Bangladeshis are also now placed in good companies around the world but we are yet to have created an environment for reverse brain drain.

Fortunately, all of these problems can be solved with the right mindset. It pains me immensely that other than a handful of people almost nobody in Bangladesh realizes how important a well-functioning banking and financial sector is.