IDBI Bank to Sell Its Mutual Fund Arm to Muthoot Finance. What Should Investors Do? - Outside View by PersonalFN

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IDBI Bank to Sell Its Mutual Fund Arm to Muthoot Finance. What Should Investors Do?
Nov 28, 2019

India's largest gold financing company, Muthoot Finance (MFIN) announced on November 22, 2019 that it has entered into a definitive agreement to acquire IDBI Asset Management Limited and IDBI MF Trustee Company. This paves the way for Muthoot Finance's entry into Mutual Fund Asset Management space.

Post-acquisition, both IDBI AMC and IDBI MF Trustee Company will become wholly owned subsidiary companies of MFIN. MFIN will acquire 100% equity shares of the two companies for a cash consideration of Rs 215 crore. The transaction is expected to close by end of February 2020, subject to regulatory approvals and other conditions being met.

With this acquisition, MFIN plans to utilise the Group's existing branch network, customer outreach and brand visibility to further strengthen IDBI's mutual fund asset base and bring a novel customer experience with focus on Tier 2 and 3 cities.

Mr George Alexander Muthoot, Managing Director of Muthoot Finance Limited, said,

IDBI Mutual Fund is a trusted player in the mutual fund space with a steady loyal customer base. At Muthoot we pride ourselves in venturing into mutual fund space through such an established player. The business objectives and customer centric approach that we follow within Muthoot Group is well aligned with the business objectives of mutual fund industry. We are excited to venture into this new path in the financial services space and we are equally excited to partner with strong, experienced and enthusiastic management team at IDBI Mutual Fund as we embark upon the next level of our journey.

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Why is IDBI exiting mutual fund business?

As on October 31, 2019, IDBI Asset Management held a portfolio of Rs 5,370 crore under management. IDBI Bank which holds 66.67% stake in the AMC and 100% stake in the trustee company has agreed to sell its entire stake. IDBI Capital Markets and Securities which holds 33.33% stake in the AMC has also agreed to sell its entire stake.

It was earlier reported that IDBI Bank is in talks with Edelweiss Mutual Fund to buyout stake in IDBI Mutual Fund.

IDBI Bank has been placed under prompt corrective action (PCA) by the RBI. Since then it has taken steps to improve capital adequacy, asset quality and profitability as per RBI guidelines. Selling of non-core assets is one such measure being taken by the bank to strengthen its balance sheet. The stake sell of its mutual fund arm will help the bank improve capital adequacy and profitability and thereby take it a step closer to get out of PCA.

Why has Muthoot Finance shown interest?

MFIN, a systemically important NBFC, is the largest gold loan company in India. It has a branch network of 4500 plus branches across 23 states, the national capital territory of Delhi and five union territories in India.

Even as NBFCs are struggling to raise funds post the IL&FS fallout, gold loan companies have seen surge in demand. MFIN's loan assets grew to Rs 34,246 crore as on March 31, 2019 and it generated Profit after Tax of Rs 1,972 crore for FY 2019. Its net worth stood at Rs 10,598 crore and it had a Capital Adequacy Ratio of 27.11% as on September 30, 2019.

The company's sound financial health makes it a good contender to manage assets of IDBI MF. Its large network of branches across India can act as a valuable channel for distribution of mutual funds.

What should existing investors of IDBI MF do?

The performance of IDBI MF's equity and debt portfolio has been ordinary. It remains to be seen if the acquisition by MFIN brings any significant improvement in the performance of the schemes. Besides, most equity schemes of the AMC do not have long enough track record to be able to evaluate its performance. If you hold any of the schemes of IDBI mutual fund and want views on whether to hold or sell them, click here.

Table: Performance of various schemes of IDBI MF
Scheme Name 1-year (%) 3-year (%) 5-year (%)
Equity Funds      
IDBI Equity Advantage Fund 9.96 13.2 10.16
IDBI Diversified Equity Fund 9.34 11.86 9.17
IDBI India Top 100 Equity Fund 17.17 12.31 8.44
IDBI Focused 30 Equity Fund 9.72 NA NA
IDBI Midcap Fund 1.48 NA NA
IDBI Small Cap Fund -0.94 NA NA
IDBI Long Term Value Fund 4.95 NA NA
IDBI Banking & Financial Services Fund 19.59 NA NA
Hybrid Funds      
IDBI Hybrid Equity Fund 3.16 6.07 NA
IDBI Equity Savings Fund 9.61 5.14 6.03
Index Funds      
IDBI Nifty Index Fund 16 15 8.02
IDBI Nifty Junior Index Fund 5.4 10.06 9.8
Debt Funds      
IDBI Credit Risk Fund -2.73 2.88 5.7
IDBI Dynamic Bond 7.45 3.42 6.33
IDBI Gilt Fund 10.98 3.69 7.01
IDBI Liquid Fund 7 7.05 7.48
IDBI ST Bond 1.75 4.92 6.66
IDBI Ultra ST 7.86 7.16 7.86
1-year returns are Absolute. Returns above 1-year are compounded annualised, Direct Plan-Growth option considered
Data as on November 25, 2019
(Source: ACE MF)

How should new investors approach the schemes after the takeover?

New investors approaching the schemes after takeover must analyse the new practices and strategies brought about by MFIN. If the new systems and practices are in the best interest of the investors, then you may invest in the schemes after carefully evaluating its performance over a period of time as compared to the respective benchmark and category peers.

Selecting worthy mutual funds is crucial to realise your various financial goals. Before making any investment, decision assess your investment objective, risk appetite, and investment horizon to select the appropriate scheme based on quantitative and qualitative parameters.

PS: If you wish to select the worthy mutual fund schemes - equity and debt mutual fund schemes - to address your future financial needs, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

And as we enter the 20th year of providing unbiased Mutual Fund Research, we present this Special Pre-Anniversary Offer only for our esteemed readers, like you.

Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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