Indian mutual funds may be at the cusp of massive growth cycle; this AMC remains Citi’s top pick 

India’s mutual fund industry might be sitting right at the beginning of a massive growth cycle, analysts at Citi Research say. The penetration of mutual funds in India remains low when compared to global peers, leaving abundant ground for various asset managers to cover. “India’s AMCs should deliver healthy (~15%) AUM/profit growth in the long term, given a large untapped base of savers and high operating leverage – a view reinforced by our analysis of the performance seen in other countries at a similar point in the industry cycle,” a recent note by Citi Research said.

Massive growth cycle ahead

The research arm of the global investment bank said that AUM/GDP of Indian asset mangers is at just 12%, compared with 63% global average. They added that other countries saw over 15% AUM CAGR for 10 years after touching this level. “In India, currently less than 2% of the population invests in mutual funds which should rise given AMCs provide a seamless/transparent investing experience,” the note said. Equity mutual fund AUM/GDP is at 5% in India against 34% global average and debt mutual fund AUM/GDP is just 6% against 24% global average. 

After attaining levels where India’s mutual fund industry currently stands, Australia’s Mutual fund AUM grew 36% CAGR in the following 10 years. Similarly, South Africa gained 24% CAGR and USA soared 20% CAGR.

Three listed players

Looking at asset managers that will benefit from this, India has three listed AMCs. “UTI clearly leads in B-30 AUM, with a 24% share in total AUM vs. 16% for the sector; though all three are ahead of the sector in B-30 equity AUM. Nippon leads in retail ETFs. HDFC is strong fixed income,” analysts at Citi said. In terms of investment performance in 10 categories of equity and hybrid schemes, the report highlighted that HDFC and Nippon are outperforming the benchmark over a 1Y/3Y horizons in 10-30% of the schemes and UTI in ~65% of the schemes.

UTI AMC — top picks

UTI AMC is the youngest of the lot in terms of their stock exchange debut. “UTI AMC is our top pick – we believe a higher profit growth from cost optimization and market share gain can drive a rerating from below-peer valuations,” the note said. UTI trade at 47x / 33x / 19x 1Y forward P/E.  Analysts at Citi have a target price of Rs 680 per share on the stock, up from its current market price of Rs 580 per share.