India's mutual funds face profit squeeze - HSBC

MUMBAI, Sept 15 (Reuters) - India's funds industry may see profits drop in 2008/09 as volatile stocks make selling equity funds tough, limiting the ability of domestic fund houses to attract fresh investors, a top executive at HSBC (HSBA.L: Quote, Profile, Research) said.

Vikramaaditya, chief executive of HSBC's Indian mutual fund unit, said costs continued to rise as the industry invested in expanding reach as well as to attract and retain scarce talent.

"This year will be largely difficult for the industry as a whole," he told Reuters on Monday.

"I do not think any player in the industry would be excluded from that and would not have the impact," said Vikramaaditya, who joined the firm in July from HSBC's securities services unit.

Dazzled by a five-year bull run in which stocks rose six-fold, Indian investors piled up equity funds, helping assets quadruple to 5.5 trillion rupees by December 2007.

But, a plunge in shares this year by a third has seen high-margin equity assets slump by a fourth and the industry's assets down about 1 percent, hurting industry-wide profitability.

"Revenues are under pressure. Costs are still growing," said Vikramaaditya, a sports enthusiast who also likes to travel and try out new cuisines, adding most of the flows were coming in lower-margin fixed income funds.

Stock funds saw first net outflows of about 630 million rupees in 11 months in August. Low-margin close-ended debt funds cornered 90 percent of the industry's total inflows of about 196 billion rupees during the month, data from the Association of Mutual Funds in India showed.

Consultancy firm McKinsey & Company estimates profitability of large and medium-sized funds in India was about 23 basis points (bps) of assets under management last year.

Factoring in the shift to lower-margin products, it estimates profitability could drop to below 15 bps this year.

While existing players will take a hit on profitability, new players would have to redefine their payback period, he said.

"They might have to look at longer gestation periods before they start making profits," said Vikramaaditya.

HSBC India fund unit has seen average monthly assets grow marginally to 169 billion rupees in the six months to August as compared to a 4 percent decline in the industry's assets. (Reporting by Nishant Kumar; editing by )

(source:Reuters India)