@lokeshreddy2007 ETFs, Index Funds and the like pose no threat to CAMS. The threat to CAMS if any comes from Blockchain. If investor folios are maintained on a Blockchain, there is no need for an RTA like CAMS. That is the disruption investors need to be worried about.
I thought CAMS revenue depends on AUM and expense ratio. When we have Index funds expense ratio is negligible so CAMS share will be cut as well. All i was trying to say is AUM will increase (Due to migration from debt to equity) but CAMS share will reduce due to reduced expense ratio so eventually revenues may not grow
Maybe once blockchain becomes successful then they would have similar services hopefully.
AUM part is intuitive as that adds to the volume, but expense ratio part is intricate. Expense ratio includes AMC’s expense in managing funds. That expense includes fund management team’s overhead, other overhead including rent etc, fees for distributors, technology provider & RTA. Index funds have lower expense ratio because fund management overhead is much low as most is done via automation. Now fund management is the major expense of an AMC. Other expenses like fees for distributors, technology providers & RTA should remain the same as there is no change.
Update: I am yet understand the enormity of Blockchain. The following article concurs with what @Chandragupta said.
In the case of countries like India where dealing with crypto and virtual currencies are not allowed, the RTA would issue a transaction request to the bank for a fund transfer and this happens by means of a smart contract. Blockchain helps reduce transactional risk and settlement time. As the network is self-regulating, there is no need for any extensive regulation. It eliminates the need for a central trust to issue authority as smart contract executes contracts by itself. Information on the blockchain is permanently available. So, permissioned parties can generate their statement of accounts at any time. Reduces operational burden as investor complaints can be addressed over the blockchain. Using blockchain technology saves a lot of time and energy which can be used to enhance the customer experience.
If the expense ratio of the MFs itself become negligible due to onslaught of ETFs, then how much would they MF’s spare for RTAs is the question, that’s what we are trying to dig. I believe that the whole CAMS story will be done say 2-5 years from now.
I completely overlooked the aspect of disruption to the business of CAMS as CAMS is in the business of technology.
Thank you @Chandragupta for bringing the Blockchain issue up and @sujay85 for the links.
Looks like the implementation of Blockchain could pose a potential threat to CAMS. I do not know if CAMS will be the one to implement this too and in fact gain or maintain the same position, or its business will be impacted. Have to check if this was asked in the previous conference calls by anyone.
@Rohit_Kadam Can you please address this issue which was not discussed in the thread until now.
Block chain is a technology that could replace tech which we rely now. But that still needs a company to operate. Any registrar can upgrade his tech to block chain.
Moreover is this not too techie business like every micro seconds crores of securities trading. CAMS are doing business of boring ledger keeping job, Where your records will get updated only once a day.
Even tomorrow kfintech brings block chain, there is zero chance of client switching from cams.
Real risks lies, if tomorrow regulator says you are holding folios and insurance policies in digital and you are not so different from what demats guys going, Let’s have some common platform where both can hold both. Then there is more chance of registrar guys losing to demat guy, than demat losing to registrar
There is no threat from ETFs to fund houses, let alone to CAMS. The ETFs are yet to pickup serious liquidity. The first ETF Nifty BeEs has an AUM of 3000 crores despite launched 20 years go. We don’t have many ETFs and the ones with good liquidity are less than 10.
The fee that CAMS gets is based of AAUM, and the ETF AUM is very less compared to the rest of the funds, so ETFs pose no immediate threat to the AAUM. The regular funds to direct funds shift is yet to happen on a big scale, so ETF story is very far from now.
I do completely agree with someone who mentioned that all technology changes/ advances would be implemented by the RTAs (basically CAMS) and not the MFs. Its obvious enough to me. If I were a MF, CAMS is not a major cost for me especially compared to the invaluable bouquet of services they provide hassle free. My main job is to just focus on managing money and marketing/ raising money. I am happy to outsource the rest to capable service providers.
One could have made similar conclusions when we went from paper based to largely paperless today, that since CAMS was largely doing the paper based weightlifting, they will be rendered without work and MFs can just use software and ERPs to get all the work. Never quite happened that way.
As a matter of fact, Mutual funds are today also held by DMAT providers as well. As consumer, we have option to either hold them in DMAT format or not. Many brokers provide that option upfront. So, NSDL/CDSL today also hold MF for those consumers who want their MF in DMAT form.
These depositories are as their name suggests - only custodian of units/shares. I guess today the RTAs provide more feature than a custodian and today also they are not a custodian. So from a high level view - the two businesses/areas look very different with no overlap as their purpose seems totally different today…
However, it is an interesting thought you present…thanks
I am not sure about this so wanted to know your thoughts - if I as a consumer start buying say HDFC mutual funds directly from their own website and do a SIP directly from their website only and sell also from there…will RTA still come into picture? Thanks
Yes, because then also RTAs will be managing the back-end. They are not like retail shops, that direct selling will hurt them. They manage the back-end all the time.
For example. I am invested in DSP liquid fund directly through their website. Now I’ve received a portfolio disclosure mail few days back. See who sent that mail!
Rather saying it is not threat, It has not picked up etc etc… What we are trying to understand is ETF or Index funds if they pick up(Much like developed world) then most of the funds will flow into Index funds whose expense ratio is very low. If MF make less money they will pay less money to CAMS as well, isn’t it?
Whenever it happens do you see a threat? So to cut some slack, Is CAMS a CocaCola? I invest now and forget about it till 2060 it would be still business and striving and paying good dividends?
Do you agree that the difference in expense ratio between active and passive (index) fund is due to less fund management & associated overhead fees in the later? Everything else remains the same! AMC will still make the same margin per transaction! So, just less revenue per transaction doesn’t mean that AMC makes less money if index fund investing picks up.
CAMS will still need to make the same backend stuffs in an index fund. So, if profitability of AMCs do not reduce then why will they negotiate with CAMS for fees reduction?
Hows that AMC will make same money? There is a huge difference between an expense of 1% and 0.1%. so you mean to say they lose 0.9% and still make same money?
Most of the active funds charge expense ratio for the research and portfolio management but in case of index funds all they need to copy underlying stocks so there is no research involved. When mutual funds start competing with each other in terms of Index funds then only 2 parameters differentiate them one is expense ratio second is tracking error so it is obvious that every fund house wants to reduce their expense ratio as much as possible
The difference in expense ratios is exclusively because AMCs need to expense more in an active fund!
To manage an active fund AMC needs a fund management team (their salaries + office space, laptops etc. + electric bill + telephone & internet bill + salaries of security & cleaning staffs) who needs to travel (TA) to meet various management teams frequently and also needs different software subscriptions for technical & fundamental analysis and so the Real Expense is huge in case of active management. Of course the AMC adds an amount over these expenses as its fee/incentive for running active funds.
To manage an index fund AMC needs just a software (traditional or proprietary) to clone index constituents. There is almost no manual intervention needed. So, all such index funds could be run by a single fund manager only. There is no need to visit managements and maybe no need for any actual office space also as such things could be done remotely also. So, you should understand why there is so much cost savings. AMC also adds its fee/incentive for running such passive funds.
Now the fee/incentive for running a passive fund should be less than that for an active fund and should account for the only difference an AMC makes as profit per transaction. So, yes there IS some difference but I guess that would be minimal.
Now the question may come, “then why an AMC pushes active funds more compared to passive funds if there is no significant difference in their profit”. I believe it is because index funds are like a commodity, and there would be almost no incentive for investors to go to a particular AMC unless its brand is powerful (tracking errors will become negligible in future as more sophisticated versions of softwares become available). AMCs can only differentiate themselves by offering active funds or proprietary algorithm based passive funds, which if successful or marketed properly will lure the investor community and that AMC will be able to garner good AUM.
Hi, https://www.computershare.com/uk …This is an example of RTA for MF in developed countries. I guess most of the MF don’t want to be involved in the backoffice works and leave it to their RTA’s. Computershare seems to be a global company (Australia as well including UK)
Indian MF industry has a lot of potential to grow compared to other developed countries like USA. In the future, many will enter into MF investments due to rise of their incomes. CAMS being established player and other player increase with such presence will obviously benefit and growth. Even competitors enter during the rise of MF industry, CAMS will tap its own portion of growth.
