Asset Management Companies (AMCs) are one of the companies with the most scalable business model in the Indian financial services industry. The revenues of the business are dependent on the assets being managed, while much of the cost structure doesn’t rise rapidly. Thus, there is an opportunity for AMCs to enjoy operating leverage as they scale up.
Minimum capital requirement for expansion
There is no requirement for the AMC to invest in new facilities, manufacturing units or heavy machinery for expansion of business. Most of the existing technological, research and operational infrastructure can support the expansion of the business to a higher asset size.
For instance, an AMC handling ₹50,000 crore doesn’t necessarily require five times the infrastructure required by an AMC that is handling ₹10,000 crore. Its expenses rise as the company expands, but it might not do so in linear proportion to the AUM.
Main areas of investment include:
Digital investing has also minimised the requirement for a vast network of physical branches. AMCs have the facility to reach out to investors from all across India through digital mediums.
Revenue growth may outpace cost growth
Operational leverage is one of the greatest benefits of the AMC model. AMCs such as HDFC Mutual Funds generate their revenue by charging fees in relation to the AUM that they manage.
Consequently, as AUM increases, revenues will grow, while operating costs will not increase proportionately. For example, the AMC might require more staff and technology as the firm grows; however, it will not necessarily increase its cost proportionately to each additional rupee in AUM.
Thus, there exists a scope for generating improved margins as the company grows. Nonetheless, profitability depends upon various factors, such as fees, mix of products, distribution costs, salary costs, among other things.
SIPs facilitate consistent asset building
The increasing adoption of systematic investment plans (SIPs) has facilitated a regular flow of money to mutual funds. Investors make periodic fixed payments, which may ultimately help build up the asset base of an AMC. They may suspend or discontinue their contribution anytime. But the long-term involvement of investors in SIPs can help AMCs get a consistent flow of new investments.
With more investors joining SIPs and investors increasing their investments, there is scope for growing assets with time. Market gains can help the assets under management grow, but fluctuations in the market may result in a fall in the AUM too.
Digital distribution helps scale up
Technology has influenced how AMCs communicate with investors. Investors in smaller cities and towns are now able to buy mutual funds using mobile apps, online portals, distributors, and other technology-based platforms.
This means that there is less requirement for AMCs to construct a vast network physically. Once this digital network has been set up, it can cater to a larger customer base with much less capital required than a physical network would have required.
Conclusion
Scalability of AMCs arises from their capability of increasing AUM without proportionately increasing their operating cost. Digital distribution, SIPs and asset lightness can help in achieving that goal. AMCs are not totally immune to costs and market fluctuations. Their profits depend on AUM growth, fee income, expenses, product portfolio and market performance.
However, when all these parameters are in their favour, their capability to increase revenues at a higher rate than costs makes asset management a highly scalable business model in the Indian financial services sector.
