Strategic Analysis, Synthesis & Recommendations for

Zerodha Entering the Mutual Fund Industry

Hemanshu Yadav, PGDM in Product Management

Your Company:
Zerodha Broking Limited

Current Industry:
Online Stockbroking and Financial Technology

Chosen Industry:
Mutual Fund Management (Direct Plans)

Industry Attractiveness Analysis:

a. Industry Life Cycle:
The Indian mutual fund industry is in the growth stage, with rising assets under management (AUM) and
increasing investor awareness. This presents an attractive opportunity for new entrants like Zerodha,
especially in the direct plans segment.

Rising AUM:

• Exponential Growth: As of December 31, 2023, the total Assets Under Management (AUM) of
the Indian mutual fund industry stood at a staggering ₹50.78 trillion (approximately $640
billion).

• Outpacing Global Peers: In 2023, the industry witnessed a phenomenal 19% jump in AUM,
surpassing the growth of established markets like Japan and China. This impressive performance
further underscores the dynamism of the Indian market.

• Strong Quarterly Growth: Even within 2023, the momentum has been consistent. The first half of
FY24 saw an average quarterly AUM rise of 16%, reaching a staggering ₹47 trillion. This
sustained growth indicates robust investor confidence and a thriving market.

Increasing Investor Awareness:

• Surging Investor Count: The total number of accounts (folios) in the industry has witnessed a
surge, crossing the 16.49 crore mark as of December 2023. This represents a significant
expansion of the investor base, implying growing awareness and participation.

• Retail Focus: Notably, Equity, Hybrid, and Solution Oriented Schemes, which attract primarily
retail investors, account for over 13.19 crore folios. This highlights the increasing participation of
individual investors in the market.

• Digital Initiatives: The rise of digital platforms and mobile apps has made mutual funds more
accessible and easier to understand, further fueling investor awareness and participation.
b. Porter's Five Forces:
• Threat of New Entrants: Moderate-to-high due to low capital requirements and regulatory ease.
However, brand recognition and existing investor base create barriers.

• Bargaining Power of Buyers: High due to increasing investor knowledge and availability of
choices.

• Bargaining Power of Suppliers: Low, as fund houses rely on AMCs, which are numerous and
competitive.

• Threat of Substitutes: Moderate, with alternative investment options like ETFs, P2P lending, bank
FDs and direct stock investments.

• Competitive Rivalry: Intense, with established AMCs, robo-advisors, and other direct plan
platforms.

c. Growth Rate:
The Indian mutual fund industry has seen consistent double-digit growth in recent years, with estimates
projecting further acceleration in the future. This offers a promising market for Zerodha's entry.

Company's Core Competencies:

a. Resource-based View (VRIO Framework):
1. Valuable:

• Brand Recognition: Zerodha has cultivated a strong brand synonymous with innovation, trust,
and user-friendliness in the online broking space. This translates to instant credibility and a loyal
customer base when venturing into MFs.

• Technology Edge: Zerodha's intuitive platform offers seamless trading experiences and advanced
tools. This technological superiority can be leveraged to deliver a best-in-class MF investment
experience.

• Cost-efficiency: Zerodha's commission-free model is disruptive, leading to significant savings for

investors. This can be replicated in direct plans, offering compelling cost advantages over
traditional MFs.

• Customer Centricity: Zerodha fosters a culture of investor education and transparency. This
resonates with the rising demand for financial literacy and trust in the industry.

2. Rare:

• Innovation: Zerodha's track record of developing cutting-edge products and features sets them
apart. They can leverage this to create unique MF offerings catering to specific investor needs.

• Focus on Direct Plans: While many existing players offer traditional plans, Zerodha's exclusive
focus on direct plans sets them apart as a true cost-efficiency champion.
 • Integration with Existing Platform: Their seamless integration of MFs within their current
platform offers unparalleled convenience for existing clients.

3. Inimitable:

• Culture and Talent: Zerodha fosters a unique company culture that attracts and retains top
talent. This translates to a dynamic and highly motivated team able to develop innovative
solutions.

• Proprietary Technology: Some of Zerodha's platform features and functionalities are built on
proprietary technology, making them difficult to replicate by competitors.

• Customer Relationships: Over years, Zerodha has built strong relationships with its clients,
creating a loyal and engaged community. This trust factor is not easily imitated.

4. Organized:

• Operational Efficiency: Zerodha's lean and efficient operations enable them to maintain low
costs and offer competitive pricing. This can be crucial for success in the cost-sensitive MF
industry.

• Data-driven Approach: Zerodha leverages data analytics to understand customer needs and
tailor their offerings accordingly. This data-driven approach can inform the development of
relevant and successful MF products.

• Risk Management: Zerodha prioritizes robust risk management frameworks, ensuring investor
security and trust. This strong foundation can be leveraged in the regulated MF landscape.

b. Synergies with Existing Business:

• Leveraging existing customer base: Existing Zerodha clients can be easily transitioned to their
mutual funds, fostering cross-selling.

• Technology integration: Zerodha's platform can be used for seamless investment in their own
funds, promoting convenience.

• Cost advantages: Direct plans offered by Zerodha can benefit from their existing infrastructure
and operational efficiency.

External Influencing Factors:

a. PESTEL Analysis:
1. Political:

• Government initiatives: Supportive policies promoting financial inclusion, investor education,

and tax benefits for MF investments can drive industry growth and benefit Zerodha.

• Regulatory environment: Obtaining the AMC license and navigating complex compliance
requirements pose challenges. Potential changes in expense ratio ceilings could impact business
models.
 • Political stability: A stable political environment fosters investor confidence and encourages long-
term investments, benefiting the MF industry.

2. Economic:

• GDP growth: Strong economic growth and rising disposable incomes increase investment
capacity and drive demand for MFs.

• Interest rates: Fluctuations in interest rates can impact investment decisions and affect the
attractiveness of MFs relative to other asset classes.

• Inflation: High inflation erodes investment returns and can deter investors from MFs.

3. Social:

• Demographic trends: A growing younger population with increasing financial literacy and
awareness of long-term financial planning presents a fertile ground for MF investments.

• Shifting investment preferences: Growing popularity of ESG investing and thematic funds offers
opportunities for Zerodha to develop unique offerings in these areas.

• Risk aversion: Increased risk aversion during economic downturns can lead to investor
withdrawals from MFs, impacting performance and investor confidence.

4. Technological:

• Fintech advancements: Digital platforms and user-friendly interfaces can increase access to MFs
and attract new investors. Zerodha's existing technological edge can be a significant advantage.

• Cybersecurity threats: Data security and cybercrime concerns require robust security measures
to protect investor information and maintain industry trust.

• Regulatory landscape: Evolving technology may necessitate regulatory adaptation, creating

challenges and opportunities for innovative players like Zerodha.

5. Environmental:

• Climate change concerns: The rise of ESG investing presents opportunities for Zerodha to
develop sustainable and responsible investment products, aligning with their customer base's
values.

• Regulation: Evolving regulations related to ESG reporting and responsible investment practices
can create compliance challenges but also offer opportunities for early adopters like Zerodha.

6. Legal:

• KYC and AML regulations: Stricter KYC and AML norms might increase entry barriers and
operational costs for new entrants like Zerodha.

• Tax reforms: Changes in tax regulations impacting investments can influence investor behavior
and affect the attractiveness of MFs.
 • Dispute resolution mechanisms: Efficient and transparent dispute resolution mechanisms are
crucial for maintaining investor confidence in the industry.

b. Market Gaps and Opportunities:

• Gap in low-cost direct plans: Zerodha can cater to cost-conscious investors with their
commission-free approach.

• Focus on innovation and thematic funds: Zerodha can develop unique funds catering to specific
investor segments or emerging trends.

• Emphasis on investor education and transparency: Zerodha can leverage its expertise to improve
financial literacy and trust in the industry.

Stakeholder Interests:
a. Shareholders: Entering the mutual fund industry can diversify revenue streams and increase long-term
value for shareholders.

b. Management Vision and Beliefs: Zerodha's focus on democratizing finance aligns with providing
affordable and accessible mutual funds.

Analysis Synthesis and Identification of 3 Key Reasons:

1. Leveraging Brand and Technology: Zerodha's strong brand recognition and user-friendly platform
can attract a large customer base, offering them a seamless and cost-effective mutual fund
investment experience.

2. Filling the Gap for Low-cost Direct Plans: Zerodha's commission-free model can disrupt the
traditional mutual fund structure by offering investors significant cost savings and improved
returns.

3. Driving Growth through Innovation and Education: Zerodha's focus on developing unique
products and promoting financial literacy can create a differentiated offering and attract a new
generation of investors.