The Association of Mutual Funds of India (AMFI) has proposed that the Union Budget 2023-24 should allow fund houses to outsource their fund management activities to other market-linked instrument providers like insurance companies.
We are used to Mutual Fund Asset Management Companies (MF AMCs) as vehicles for management of funds, for unit-holders. A multitude of unit-holders would pool their investments by purchasing units in the funds / schemes offered by the AMC and the AMC would manage the investments as per mandate. This is the structure on which the industry runs. Now, let us look at the structure and symbiosis of the macro system.
When mutual funds become service providers
Any expertise developed by any organisation or system can be put to multiple usage, leading to synergies. Same is the case with AMCs. AMCs in India, with firewalls but under the same group umbrella, offer fund management to their foreign counterparts for their India-dedicated funds. This is prevalent for global fund management houses with presence in India.
The funds or schemes are not mixed up with the usual ones that are offered to retail unit-holders, but the structure and skill sets are utilised within the regulatory framework. There are Feeder Funds offered by AMCs in India, where unit-holders in India invest in INR and the money is invested in designated funds abroad. The conversion from INR to USD / other currency is managed by the AMC. In this case, the fund management structure abroad, of the same fund management house, is utilised for the offering in India.
AMFI has announced its proposals for the Union Budget to be presented on 1 February 2023, popularly referred to as “wish list”. Among other things, it proposes “Request to permit insurance companies to outsource the fund management activities to SEBI-registered MF AMCs”. There is merit in this proposal.
Asset managers, not just mutual funds
Globally, insurance companies follow an open architecture approach to fund management. In this approach, insurance companies create appropriate products and utilise the services of professional asset managers in discharging its investment management function. This leads to optimisation of fund management capabilities, in-house and external. In India, National Pension Scheme (NPS) offers multiple fund managers to investors. In the mutual fund (MF) industry, it is easy to switch from one fund manager to another, as flexibility here is better than in the insurance industry. There would be tax implications for the investor on switch from one MF scheme to another, but there is no lock-in. Similarly, insurance companies can offer external fund managers as an option to policy-holders. The business remains in-house, with an option to the customer to switch fund managers.
The counter-argument to this would be, insurance providers may not like to dilute their brand, i.e. be seen as offering another fund manager, namely an MF AMC. But here’s what can be done:
· On a pilot basis, it may be started for Unit-Linked Insurance Policy (ULIP) schemes. Traditional or conventional insurance policies are not exactly fund-management-oriented but more about scheme features. ULIPs being market-linked, offering an external fund manager as an option to policy-holders would impart a sense of choice to the customer.
· While the regulator may allow outsourcing to any MF AMC, to start with, for the sake of branding, insurance companies may offer their in-group MF AMC. There are business conglomerates with banking, insurance, MF and other businesses in the same group. Offering in-house ULIP fund management and in-group MF AMC as an option would not lead to brand dilution.
· To most customers it would not even matter, in terms of brand dilution. When one invests in NPS, it would be a matter of ticking a checkbox at the initial stage, to select the fund manager from the options available. Afterwards, one may not recall at the first instance, which fund manager s/he had chosen. Similarly, when one purchases a ULIP from an insurance company, the brand fronting it would be more visible.
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What are the synergies in this arrangement? To state the obvious, MF AMCs have the set-up and skill-sets in place. The bigger point is, multiplicity of options. The number of fund categories on offer are 11 equity funds, 16 debt funds, six hybrid funds plus index funds, theme/sector funds, etc. Rather than the insurance company duplicating the efforts, it can simply be given access to.
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