Here’s why L&T Finance may have sold its mutual fund business so cheap

• L&T Finance Holdings said it would L&T Investment Management to HSBC for $425 million.
• Shares of L&T Finance Holdings fell as much as 7% because the street felt that the company sold the mutual fund business at a very low price.
• There is more than one reason why L&T may have chosen to do so.
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Shares of L&T Finance Holdings slipped 7% because the street felt that the company sold its mutual fund business at a very low price to HSBC.

“Generally, AMC businesses are valued at a percentage of AUM where this deal is done at 4% of AUM while Nippon is trading between 7-8% of AUM,” explained Santosh Meena, head of research at Swastika Investmart. In that case, L&T’s mutual fund business should have been worth ₹5,479 crore (7% of assets under management a.k.a AUM). But all it got was $425 million or ₹3,187 crore.

Why so cheap, bro!

According to Meena, SEBI's new regulation and the performance of its funds may have been the cause.

In September 2020, SEBI told mutual fund operators like L&T Investment Management, SBI MF, HDFC MF and ICICI Prudential MF to reduce the number of schemes they sell and categorise them such that investors know what they are selling, clearly. For example, after these rules, a company can’t sell two mutual fund schemes of similar themes under different names.

So, some of the so-called ‘tricks of the trade’ were of no use anymore.

And, as Meena pointed out, that performance of L&T’s mutual funds lagged behind many of its peers. The company, with the sum total of all its firms, was ranked 12 among 45 mutual funds in India in terms of the money it manages at the end of September 2021.

Top two best performing schemes of L&T MF in terms of one year performance:
Compare this performance with the top three mutual fund schemes, and L&T’s schemes are lagging far behind:

Plus, L&T, the infrastructure and construction giant, has been getting rid of other businesses that are not core to business and mutual funds were one of them.

HSBC clearly got a good deal out of it. It will add another ₹78,273 crore to its existing pool of money that it manages, about ₹11,700 crore, and become the 12th largest fund house in the country, at nearly half the price.

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