Zerodha may bring in innovation in mutual fund manufacturing, just like it brought in discount broking business into stock broking
Discount broking firm Zerodha is planning to enter the mutual fund asset management business. The company has applied for an asset management company (AMC) license which will pave the way for it to enter the mutual fund manufacturing business, which is at present dominated by bank-backed firms like SBI, HDFC and ICICI, besides global AMCs like Franklin Templeton, Invesco and Mirae Asset.
Zerodha, founded by brothers Nithin and Nikhil Kamath, started in 2011 as a discount broker. Discount broking means allowing buying and sale of shares at lower rate, however, will not provide research or stock analysis as opposed to a full service broking house like IIFL or Edelweiss. A full service broker will have higher broking charges although it depends on the trading volumes.
Zerodha, after a relatively slower progress till 2015, started seeing an enhanced customer acquisition over FY16-19 which continues till date. Over past few years, many players like 5Paisa jumped into this game and offer similar value proposition.
Zerodha started mutual fund purchase through its Coin platform 2017, and also obtained NBFC license to start margin funding for its broking customers. Its claim to fame has been offering brokerage-free equity investments (you only pay a fixed fee at the time of sale) to retail investors, besides dealing in institutional broking, currencies and commodities trading and so on.
“To grow the capital market participation from the current 1.5 crores and address those who currently don’t invest (millennials), we think mutual fund as a product needs to be reimagined. So yeah, we have just applied for an AMC (Mutual fund) license,” Nithin Kamath, founder, Zerodha tweeted.
The net worth requirement for an AMC is Rs 50 crore.
Some have pointed out the similarity between Zerodha and the much larger US broker Charles Schwab, which had started broking business in 1985 and built a customer base of mass retail customers by offering low prices.
While being a Charles Schwab may be sometime away, one thing is for sure Zerodha is credited with disrupting the broking market in India. As a discount broker, it not only competed with full scale brokers like ICICI Securities, HDFC Securities, Angel Broking, Sharekhan, Kotak Securities, but also reported massive growth between FY14 and FY19 in active clients to become the numero uno in terms of client count (not revenue).
The AMC or MF business is very different from discount broking, which is solely dependent on online traction. However, since Zerodha has the largest broker client base now, it needs to merely tap for the MF business into that existing captive user base of over 1.5+ million clients who place millions of orders every day through its ecosystem of investment platforms. But the success in AMC business depends on how you deliver returns to investors, which means you need fund management capability.
It is also expected that Zerodha will bring in much needed innovation in mutual fund products, just like it completely re-imagined broking business. Zerodha has started an Alternative Investment Fund (AIF) called True Beacon, wherein it is trying to only charge the client when they make a profit.
India’s largest mutual fund distributor NJ Invest has also applied for a mutual fund AMC licence last year.
It may also be recalled that Sachin Bansal, founder of Flipkart, is also entering diversified financial services business including mutual funds. Bansal’s BAC Acquisitions had acquired Essel Mutual Fund in 2019.
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