Over the last three years, major names such as Fidelity, Morgan Stanley, PineBridge, and Deutsche have exited the Indian mutual fund industry. This trend has continued with the more recent decisions of Goldman Sachs Asset Management and Belgium's KBC Asset Management to pull out of the country's mutual fund space.

Global financial services research firm Cerulli believes that there are two main factors that drove these firms to close their mutual fund businesses in India--distribution pressures and regulatory uncertainty.

The Indian industry comprises 43 asset management companies (AMCs), with INR13.16 trillion (US$198.5 billion) in average assets under management for the July-September quarter. Of this, the top-5 AMCs accounted for 55.2% of industry assets while the top-10 accounted for 77.2%, indicating a huge concentration of assets among these firms.

Meanwhile, a constantly changing regulatory environment is also frustrating firms. Cerulli notes that the Securities and Exchange Board of India (SEBI) is taking investor-friendly steps in its attempts to increase industry reach and make mutual funds affordable. However, the distribution fraternity has been complaining over the periodic changes and increasingly stringent norms on commissions.

What then are possible strategies that can sustain a foreign asset managers business in India, especially as India is one of the few economies in the Asian region that looks attractive over the medium to long term?

A look at the top fund houses in India shows most global firms have joint ventures with a large domestic bank or financial institution, or have a corporate brand as their sponsor. This makes it easier for them to reach a larger network of investors and gather assets.

For any foreign player to sustain a presence in India over the longer term (beyond three to five years), a tieup with a big local brand to shore up distribution capabilities, a strong long-term commitment, and patience are musts. We note that even as some players exited the country, a few others have entered through joint venture route in recent years (Nippon with Reliance and Schroders with Axis). In fact, in October Nippon Life raised its stake in Reliance Mutual, to 49% from 35%.