SBI MF: Betting big with AIFs

Shamsher Singh (Right), MD and CEO with DP Singh, Deputy MD, SBI Funds Management Image: Nayan Shah for Forbes India
 
Last week, SBI Mutual Fund, India’s largest fund house by assets under management (AUM), completed an exercise which typified what the Indian financial sector values it for. SBI Funds Management—the asset management company (AMC) of SBI Mutual Fund—completed the mandate of liquidation of securities of six wound-up Franklin Templeton mutual fund schemes, directed by the Supreme Court in 2021.   
 
In 2020, Franklin Templeton Mutual Fund had cited unprecedented redemption pressures, leading up to a freeze by the regulator Securities and Exchange Board of India (Sebi), after finding serious lapses and a breach of its mutual fund guidelines.  
 

SBI Fund Management liquidated 217 securities and disbursed around Rs27,508 crore which constituted 109 percent of the value of the securities as on date of winding up. “We have done it in a judicious way without hitting the liquidity in any of the segments or products. There had to be someone who could take care of the issue,” Shamsher Singh, managing director and CEO of SBI Mutual Fund, tells Forbes India. Singh, on deputation from parent State Bank of India, is a veteran SBI banker with over 32 years of experience.  

SBI MF holds the top position with average assets under management (AAUM) of around Rs8 lakh crore ($98.5 billion) from an industry total of Rs46 lakh crore, which works out to an AUM market share of just under 18 percent (see infographic).  

While private sector mutual funds, from ICICI Prudential AMC, HDFC AMC to Nippon Life and Edelweiss AMC, have grown in size and mutual fund distributors have aggressively sold their schemes, particularly through systematic investment plans (SIPs) in the past two decades, SBI MF has been able to occupy leadership position thanks to the parentage, managing the EPFO money and adoption of technology. SBI MF today covers 95 percent of the PIN codes in India.
   
In the three years to March 2023, SBI MF has also taken advantage of being a fund manager to manage inflows from the Employees’ Provident Fund Organisation (EPFO)—alongside UTI AMC—and channelise the EPFO money largely towards debt and the balance towards equity products.   
 
But if one were to exclude the EFPO money, private mutual funds such as ICICI Prudential AMC and HDFC AMC would appear to be serious competitors, analysts say.
 

Unlisted stock in demand   

HDFC, Nippon Life India, Aditya Birla Sun Life and UTI are the listed AMCs in India. SBI MF remains unlisted, but has found strong demand in the unlisted market.  



“We see a lot of demand and less supply for the shares. There are not too many sellers at the moment. The only sellers coming forward are those who might want to liquidate a small portion of their unlisted portfolio,” says Krishna Raghavan, CEO of Unlistedkart, market-making and research platform for unlisted stocks, and part of Qapita group. Qapita is a SaaS- platform focussed on equity and transaction management for the private market. 

The SBI MF stock is now quoting close to Rs1,050, having started at Rs975. SBI has a 62.5 percent stake in SBI Funds Management. Thirty-seven percent is held by European asset manager Amundi, through Amundi India Holding, a wholly-owned subsidiary, while a small portion is the employee stocks pool.  
 
The demand for the unlisted SBI MF is from investors who bet that the fund house will continue to remain one of the most trusted brands in India in the coming years and that the financial sector will continue to expand over the next two decades. 

Also read: Interest rates will have a mild upward bias because growth is strong, along with inflation: SBI Mutual Fund
 
“I expect SBI MF to report consistent 20-25 percent returns over the next eight to 10 years,” Krishna says, forecasting a 15-20 percent upside year on year, for the next 10 years.  
 
In 2021, there were plans for a listing of SBI MF, but in August, SBI Chairman Dinesh Khara said the IPO for the mutual fund business was “out of focus”, at a post-earnings media gathering. The initial talks were for SBI to sell a 6 percent stake in the AMC, and Amundi, another 4 percent.   
DP Singh said the plans for a listing would depend on what the shareholders think. “Our job is to create value. When they want to monetise it… it is up to the shareholders,” Singh said.     
 
SBI and Amundi together hold 99.35 percent of the shares. It is quite unlikely that either party will sell their stakes prior to a public listing. Owing to this, the supply currently available is quite exclusive up to the actual IPO.  
 
At the analysts meet held on August 4, Khara said: “Our subsidiaries have also consistently performed well and continue to create significant value for all the stakeholders and most importantly for the customers. Most of our subsidiaries are leaders in their respective segments.” Thus, for the next one or two years, it appears unlikely that SBI MF could go public.  
 
The financials for SBI MF are impressive—its AAUM grew at a CAGR of above 28 percent in the five-year period to December 2022, while the rest of the market grew only at around 10 percent over the same period (see data).
 
SBI MF’s PAT grew around 150 percent from FY19 to FY22, while its pace of growth increased from 28 percent to 54 percent. Median PAT growth among listed peers during the same period is 50 percent.   
 
At a price per share of Rs1,000, SBI MF is fairly valued at an estimated 40x P/E, in line with its significant four-year EPS CAGR from FY18 to FY22 of 34 percent, an investment note from UnlistedKart shows.  
 
India’s mutual fund industry is a crowded space with several new AMCs having entered in recent months. These include the Samir Arora-founded Helios Capital, Nithin Kamath’s Zerodha AMC and Bajaj Finserv AMC. Jio BlackRock, an equal joint venture between Reliance Industries’ Jio Financial Services and US-based BlackRock will work to provide accessible, digital-first investment solutions in India. [Disclaimer: Reliance Industries is the owner of the Network18 group, which publishes Forbes India].
 
AMFI data shows that India’s mutual fund industry has been adding approximately Rs10 lakh crore (Rs10 trillion) every three years. A strategic consultancy, BlueWeave Consulting, estimates that the Indian mutual fund industry is predicted to grow at a CAGR of 22.5 percent by the end of 2028.  
 

Betting big on AIFs  

New mutual fund entrants may find it difficult to introduce different debt products, but on the equities side, there is more scope, particularly in the form of hybrid, flexi-, small-cap or mid-cap funds. Equities, in recent years, have become the more favoured route for investors, growing to 51.3 percent in February from 48.2 percent, in the scheme-wise composition of assets, according to the UnlistedKart report, quoting AMFI data.  
 
Alternative Investment Funds (AIFs) have emerged as one of the new investment assets to invest into—besides Portfolio Management Services (PMS)—for sophisticated, high-income investors. Both these investment instruments require minimum investment from individuals, of Rs1 crore for AIFs and Rs50 lakh for PMS.
 
AIFs grew at a 50 percent CAGR for the five years ending FY22, a December 2022 Crisil report showed. AIFs are projected to grow the fastest, at 32 percent, among all investment instruments, including mutual funds (19 percent), PMS (18 percent), life insurance (14 percent) and retirement funds (20 percent) for the five-year period 2022-2027, the report shows.  

Also read: The market is hot, but should you sell or hold your mutual funds?
 
It is no surprise then that SBI MF has planned AIFs as its next target for strategic growth. “AIFs is a natural journey. That is the next growth engine for the industry. In the retail investor segment, this group is still nascent for us at Rs1,000 crore but is higher for institutions at Rs12 lakh crore (excluding mutual funds),” DP Singh said.   
 
In July, Finance Minister Nirmala Sitharaman announced the launch of the Corporate Debt Market Development Fund (CDMDF), a specialised AIF, which will be regulated by Sebi. The fund has been launched to take care of the corporate debt market in case of any dislocation. The entire mutual fund industry will provide—through fixed income schemes—up to 10 percent (Rs3,000 crore) of the funds required while the majority 90 percent (Rs30,000 crore) will be pumped in by the government.  
 
“This CDMDF will be able to buy securities from any fund regardless of over redemptions. It is a very proactive step, but we wish that the dislocation does not come,” says Shamsher Singh.  
 
The guidelines for the fund have been disclosed to the industry and legal formalities are expected to be finalised soon. 

The SBI MF leadership is confident that the growth momentum will sustain in the coming months. “Corporate and financial institutions’ balance sheets are comfortably placed. The growth path is strong. We are at the fag end of the interest rate hike cycle. We might see a 25 basis points hike in the coming months, depending on how inflation levels out over the next two to three months… but it is not a matter of great worry,” adds Shamsher Singh.  

The need to leapfrog   

Both Shamsher Singh and DP Singh are confident that SBI MF should be able to touch its next realistic AUM target of Rs10 lakh crore (Rs10 trillion). “We see this as a reality, provided the market behaves,” Shamsher Singh said humorously.   
 
DP Singh finds the lack of knowledge among intermediaries and keeping them upskilled as a challenge ahead. From an equity market perspective, the risk appetite of the newest investors is “fragile”. “People have not seen the downside, so any correction could cause concerns for them,” he said.  
 
SBI MF, due to its leadership position, can continue to achieve scale as distribution continues aggressively. “The scale, the reach and the brand presence that SBI MF can utilise cannot be duplicated in the foreseeable future. The only question is how well the fund house leverages that and how far they go with it,” says Dhirendra Kumar, founder and CEO of Value Research, an independent investment research firm. 

Being the market leader in selling a retail savings product means it’s a given that they should set the rules of the game. 

The parent SBI will need to identify leaders who can take SBI MF to the next level. After all, the bank has hadsuccess in creating and executing the digital banking platform YONO.   

"To realise its true potential, the industry needs a visionary leader who can make mutual funds the default choice for all Indians. ," Kumar said.