BharatBond may turn game-changer for Edelweiss Mutual Fund, putting Edelweiss MF in media hotspot zone and a business fast-track mode
Strategy indicates an apparent loss in revenue, digging deeper one can see the amazing strategy of amassing a huge AUM at one go, every minute effort in the NFO Will pay-off, given the government has turned spokesperson by choice.
Wise men said, ‘to earn money, you don’t need money’ and ‘money is not the only wealth you create’. Words will fall short for praising one of the most dynamic CEOs of our times, a star of financial markets and one of the smartest I have come across so far, Ms. Radhika Gupta. She is not just selling the cheapest funds of the world to Indian investors; she is adding wealth worth of crores in goodwill for Edelweiss and acquiring invaluable customers in the process. Here, I am putting together some facts that weaves a story of Ms. Radhika Gupta, what she did and why she exactly did through Bharat Bond.
Let the story begin with Bharat Bond, a defining moment for debt market in India. It has many firsts to its kitty and for Indian financial market.
Bharat Bond is the first Corporate Bond ETF of India, in a nuthell, few points are – it will be tracking the newly launched Bharat Bond Index with lowest expense ratio in the world – 0.0005%. The bond ETF offer has base size of 6000 crore and government can retain upto Rs. 15,000 crore. This also a unique open-ended fund with defined maturity dates. The ETF comes in two formats – 3 years maturity and 10 years maturity. Holding AAA rated bonds of the best PSUs in India, the yields likely to be at par with liquid funds, slightly higher than fixed deposits, as interest rates are at rock-bottom. With minimum investment of Rs. 1000/- it is targeted at retail investors. Though the initial offer period is 12 – 20th Dec, by virtue of being ETF, one can enter and exit the fund any time they wish. For investors who don’t have demat account, fund is available in FoF format, one can buy with help of their advisor. The exit load is at 0.1% for first month of investment in case of FOF. It would be a good alternative for parking cash for small duration like 6 months – 1 year. Bond market in India is not evolved for retail participation in secondary market, with this initiative many uninitiated likely to open demat account, buy mutual funds for the first time. Bharat bond also likely to widen and deepen the bond market of India.
ETF as an instrument is known for its low cost structure, SBI MF Nifty ETF charges 0.07%, debt should be lower, however, this offering is a rarest of rare bargains. Edelweiss effectively charging Rs. 1 for Every 2 lakhs of investment.
After the low cost ETF, let us shed some light on the Edelweiss Mutual Fund. This is a mid-sized Mutual Fund house with a big promoter backing ‘Edelweiss’. The 10 year old AMC, is ranked at 20th among the 44 MF houses as per the AUM data of September 2019 . They have 6 Equity Funds, 8 Debt Funds and 4 Hybrid Funds as per their website. Yet, the AUM size or the number of funds may not be true reflection of the quality of the talent fund house. Their fund management team is pretty strong with 6 equities fund manager, 3 debt managers (2 Chief investment officers), 4 Fund manager in alternate investment and 2 in PMS segment, they team is built to take on the incremental AUM it may see. They have made a net profit of Rs. 2.6 crore in the year ending 2019 March, after a loss in preceding financial year. With initial acquisition of Rs. 15000 crore in asset, the fund house may move up by 4 or 5 ranks, but what is worth noting, it actually has a potential to acquire asset worth more than the cumulative AUM of bottom 15 players at one go. That is incredible, lest we forget the pain of Mutual Fund houses to come up with NFOs with stricter guidelines by SEBI in recent years, coupled with super-thin agent commissions the distributors get. Adding upto the woes, MF industry is no stranger to winner take it all mindest, top 5 AMCs account for 60% of the total AUM . Though Edelweiss performed well in the debt fund categories, NFOs still would have been quite a hurdle and no assurance of a minimum expectation to contribute to existing AUM. In the current market scenario there are hardly any path left for fund houses other than adding folios through SIP, and competition is tough for smaller players, players are trying innovative approach to increase their AUM.
As per Sep 2019 AMFI data, the Edelweiss Mutual Fund AAUM stands around Rs.11,800 crore. If government retains 15,000 crore Rupee in Bharat Bond ETF offer, the AAUM of Edelweiss likely to have close to Rs. 25,000 – 30,000 crore as an AUM, a long and a high jump with with a minimscule customer acquisition cost of advertising and expenses on the Bharat Bond ETF. Also, though the Bharat Bond is getting a deserving big bang launch, it will take us a quarter to see how it is pannning out and what is the impact on Edelweiss MF AUM.
An interesting in point here is the Fund AUM itself is more than many small Mutual Fund companies. (if I can take the liberty of talking of a recent acquisition of AMC, Muthoot is shelling out Rs. 215 crore rupees to buyout of IDBI Mutual Fund with asset size of about 5400 crore and the existing customer base) If we compare it with Bharat Bond ETF contribution to the assets size of the Edelweiss AMC AUM, it does draw an amazing parallel and smart move by Edelweiss Mutual Fund to beef up their asset base. If Edelweiss bought the asset in that manner, it could have faced panic redemption, much lower return on investment in initial years, putting the company back in red, also there are additional requirements of rebranding expenses etc. So, though company may be making some loss in managing this fund, we must look at many other factors before we pass our judgment on this inititive. Advertising costs of financial product launch is a huge expense, in this traction, they retained their existing PR agency and advertising team, they didn’t go for IPO/ NFO special communication agencies. So their advertising costs to support may have been marginally high keeping a strict cap on the usage of funds. Such important transaction generally needs multi-crore budget. They have used apt use the super quality underlying asset and the government backing at its best, reducing advertising cot and maximizing the benefit of earned media. This new fund offering is likely to be a super smooth ride.
With an expense ratio of 0.0005%, it earns Rs. 1. So, if government retains even up to Rs. 15000 crore in the fund, the Mutual Fund earns meager Rs. 750,000, which is less than a junior executive salary in a business of AMC. Moreover, Edelweiss is also undertaking all the promotional expenses – print, digital, (TV – if any) I came across digital ads and promotional video in a celebrity influencer channel (the cost could come for a fraction of cost than a Youtube advertisement – which has generated tens of thousands of views already, follower of the influencer stands at 1.2 million.
This step would have helped any fund house below 10th rank, but Edelweiss outsmarted all. For Bharat Bond, Edelweiss getting spokespersons and influencers rallying for them from Finance ministry, the whole financial fraternity, personal finance expert giving them free publicity and goodwill.
If you look closely and analyse, the achievements are more than a hat-trick for Ms. Gupta. The cost Edelweiss will bear in this fund and the return it will earn is much more than the ROI in financial terms. Ms. Gupta has managed to acquire AUM thrice the size of IDBI Mutual Fund with a meager acquisition or advertising cost, more than doubling the asset base. Edelweiss will have access to lakhs of retail investors, who didn’t pay attention to the fund house yet, any conversion from the ETF into other mf scheme assets will be ann added bonus. Worth crores of rupees of earned media and goodwill built in the process.
Access to finance ministry and completing a deal is more than just ice-breaking process with Indian government, it may be able to get more such opportunities. Edelweiss over last two decades have worked consistently strengthening its portfolio in financial services space. The Mutual Fund wing launched in year 2008, hasn’t garnered much investor love in 10 years. But launching BHARAT ETF could be an absolute game changer for the fund house.
End of the day it’s not every day Prime Minister and Finance minister of India lends their open support to promote your product/ services. For Edelweiss it was a real public out reach and congratulations to Ms. Gupta for acquiring an intangible asset of goodwill with minimum cost, a PR success.
A separate post to follow on the investment details and viability for retail investors.
Data Source – AMFI Data, Edelweiss website, Edelweiss Annual Report, Moneycontrol