1. What is Mutual Fund?
According to Investopedia:-
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
2. How it works?
3. Industry Dynamics
As mutual fund investment is used by us as a saving instruments. In order to understand future prospects of this saving instrument, let’s first understand basic of savings (Popular term used in economics for saving of all individual and unregistered small businesses -MSME is called “Household saving”)
a) How we save as % of total income,
b) How much of it we put in financial assets like bank deposit, mutual fund, shares etc. and physical assets like gold , real estate and
c) What is penetration of Mutual Fund in India and what are its growth prospects
a) Household Saving
Households saving rate is decreasing from 22.5% to 18.2% mainly due to higher consumption, low job creations and an increase in debt. But still whole saving amount is Rs. 34 lakhs Crores.
b) Structure of Saving
Out of total Rs 100 of saving, we put Rs.63 in physical asset and Rs.36 in financial asset. (There was spike in saving in financial asset in 2016-17 due to demonetisation)
Out of Rs.36 of financial asset we put approx. Rs.4 in shares & debentures and Rs.3 in mutual fund
c) Mutual Fund penetration and future opportunity
Current asset under management (AUM) is Rs. 24 lakhs crores as on 30th June 2020 which has grown from Rs. 11 lakhs crores in 12 lakhs crores in 2014-15. (Growth of 15% over last 5 years).
Despite strong growth of 15%, India’s AUM as % of GDP is lowest at 12% as compared to other developed countries which indicates huge size of opportunities.
4. Company Dynamics
a) Financial position (Weak):
Main source of revenue for Mutual Fund Company is management fees charged for managing mutual fund scheme. Management fee is linked with AUM (asset under management). Higher AUM translate to higher revenue (fee) and vice versa.
The company is not able to capitalise on the overall industry growth in AUM. The company is not able to growth its revenue and profits for the last 3 years
b) Competitive Edge (Low):
i) Low Barrier to Entry: As mutual fund don’t require huge capital to invest in plant and machinery or land (asset light business), there is low barriers to entry.
ii) Distribution is key: Distribution reach plays critical role in success of growth of mutual fund. That’s why top 3 mutual fund houses in India – HDFC, ICICI and SBI dominates this business (due to vast distribution via their bank branch network)
UTI don’t have vast network as that of MF houses backed by Bank
iii) Performance: High performance (beating benchmark) over long period (more than 10 years) plays critical role in success of the company.
There are very few UTI equity fund which have delivered benchmark beating return over long period of time.
iv) Brand Name: Though brand name play important role in attracting customer in MF industry, it doesn’t translate into higher bargaining power or pricing power with customer. So it doesn’t contribute to the competitive advantage of MF Company.
Even though UTI brand is backed by Govt., it has lost its brand power due to sub par performance over last many years.
c) Competitor Analysis:
UTI is losing market share to big competitors which is not good sign
The same is reflecting in low ROE of the company.
5. Valuation :
Though shares are offered at attractive PE and PB multiple, there is decreasing trend in revenue, profitability and ROE. Also by reverse DCM method, growth rate implicit in the earning is around 17% to 18% which is quite high compared to historical earnings growth.
It reminds us of a quote by Warren Buffet
“Bear in mind–this is a critical fact often ignored – that investors as a whole cannot get anything out of their businesses except what the businesses earn. Sure, you and I can sell each other stocks at higher and higher prices.”
Considering low competitive advantage, subpar financial results, and fair valuation, it is advisable to not subscribed for UTI AMC IPO.