SBI Funds is going public

**Akshara** (0:04)
In today's episode, we'll break down two important stories. First, we'll talk about SBI Funds going public, and then we'll talk about why land is a nightmare in India. Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Tuesday, 14th July. Coming to the first story.
So, SBI Funds Management's IPO opens today, and it comes to market as the largest asset manager in India. It's held the top spot since 2021, and the prospectus opens with a very big number. It manages around Rs 29.5 lakh crore. But there's a catch. So, while SBI manages more money than its peers ICICI Prudential or HDFC EMC, it earns less revenue than them. And this is not a knock on the company, but a signal that the largest is a slippery word in this business. The SBI Funds business is far more nuanced than the headline Assets Under Management or AUM number. Now, in ICICI Prudentials EMC listed last year, we used its prospectus to walk through how an asset manager makes money in the first place. We won't repeat the basics here. So, this piece is about what makes SBI its own kind of animal.
Let's start with that Rs 29.5 lakh crore. This isn't a single pool. Only about Rs 12.5 lakh crore of it is actual mutual fund money. And the bigger chunk of roughly Rs 16.9 lakh crore sits in Portfolio Management Services or PMS and Advisory.
SBI is in fact the country's largest PMS manager with close to 40% of the market. And that sounds like a diversified franchise, but if SBI's roughly Rs 4,400 crore in operating revenue, around 96% comes from the mutual fund business.
That enormous PMS and Advisory book brings in only Rs 155 crore of profit, measly in relation to the revenue. The reason is that most of it is low-margin institutional money, essentially statutory and provident fund style mandates from EPFO that arrive in gigantic size, but pay next to nothing. For context, our back-of-the-envelope calculations tell us that SBI earns around 35 paise a year for every 100 rupees in mutual funds it manages. On everything else, it earns close to a single paisa. Clearly, not all AUM is the same, and that's true even inside the Mutual Fund Book. So, active equity funds, where a manager actually picks stocks and charges the real fee for it, make up about 42.5% of the Mutual Fund AUM, but throw off roughly three-quarters of its fees. Passive funds, which are index funds and ETFs that just track a benchmark cheaply, are about a third of the book, but contribute barely 5% of the fees. A rupee parked in an active equity fund is worth around 10 times a rupee parked in a passive one. This is the threat that explains why SBI's peers seem to fare better on revenue. While it earns about 35 basis points on its Mutual Fund Assets, ICICI earns around 52 and HDFC around 44
That gap is easily explained by what kind of money each one holds. Active equity is a much larger portion of the book for ICICI and HDFC compared to SBI's. But none of this makes SBI a worse business, just a different one. It got to be the biggest partly by piling up low-hanging fruit like huge passive and institutional books. But the trade-off is that that's exactly the money that drags down what it earns per rupee. So simply, this is a volume rather than value play. Now, if that were the whole story, SBI would look like a giant slowly being out-monetized. But the mix has been shifting and in the right direction. So between FY24 and FY26, SBI's equity-oriented assets grew at 22% a year.
In comparison, its passive assets grew at around 13%, and its low-fee liquid funds crawled along at under 6%.
The share of equities in the mutual fund book rose from 39% to 42.5%.
Passive share actually fell. And as a result, the fee it earns on each rupee climbed up. Now, that shift might sound small, but it's also why SBI's revenue compounded at nearly 28% a year over that stretch, even though its assets grew only about 17%.
The company didn't just gather more money. The average rupee it manages became more valuable. So what the prospectus doesn't tell us is how much of this is SBI winning new customer money versus a rising stock market simply lifting the value of what it already held. A bull run flatters both the mix and the fee yield without proving the company is taking market share. Now, an asset management price is a weak weapon. Fees are largely set by the regulator, while competitive pressure does the rest, so nearly no one has pricing power. What you can control is cost. This is the one dimension where SBI is genuinely, measurably ahead of everyone. So SBI's operating costs run at about eight basis points of assets, the lowest among the ten largest AMCs, all of which operate on 10 to 25 basis points. Its core operating margin sits near 79 percent. And once the research team, the compliance systems, the technology and the distribution machine are built, another rupees 10,000 crore of assets costs almost nothing extra to run. The whole thing is a fixed cost factory, and SBI's is the biggest and cheapest one on the street. Now, the top three AMCs have held roughly 40 percent of the market for years, and small, nimble players have been gaining share. But the mid-sized firms in between have been steadily squeezed with their combined share sliding from about 41 percent to 36 percent in five years. There are giants at one end, niche specialists at the other, and a thinning middle class. So in a world where fees only ever fall, the least efficient managers get squeezed first, and SBI's cost base means it can absorb that pressure longer than almost anyone. Also, notice what the moat is not. It isn't investment brilliance. SBI's own disclosures show about a quarter of its equity schemes land in the top quartile of performance. So what that means is SBI became the biggest AMC in the country without demonstrably beating its peers at investing. That is the clearest possible evidence that in Indian asset management, distribution and trust is equally, if not more important than just performance. The second half of the moat is distribution, and its strongest exactly where the industry is thinnest, outside India's biggest cities. So the RBI classifies everything beyond the top 30 cities as B30, and this is SBI's home turf. B30 makes up about 22.8 percent of its assets against an industry average near 18 percent, and about two-thirds of its systematic investment plans originate there. So in smaller towns, trust matters more, making it difficult for SBI's peers to replicate this success. But that reach shows up as bred far more than depth. SBI runs about 1.6 crore live SIPs, pulling in roughly rupees 4,000 crore a month, and has about 15.5 percent of the industry's SIP accounts, but only 11.4 of its SIP money. Now, the average SBI SIP is roughly a quarter smaller than the industry's, and its share of SIP rupees has also been slipping from 12.9 percent in FY24 to 11.4 in FY26. So, it's winning accounts faster than it's winning money. And that also corroborates with the higher market share in B30 cities, because those cities are likely to have investors starting their journey with smaller amounts. But it also points to data where SBI needs to nudge small tickets upward, adding step-ups and selling more products per customer. So, an AMC has only two real levers. Manage more money or earn more on the money it manages.