India will continue to be one of the fastest growing asset management markets in the world and will see total assets in its fund industry grow to Rs12.8 trillion ($325 billion) over the next five years, according to Boston-based research firm Cerulli Associates.

Indian mutual fund assets stood at Rs5.4 trillion ($137.6 billion) at the end of 2007, up 67% from the year before.

ôThe industry has seen an unprecedented expansion over the last three years, with year-on-year growth rates of 32%, 62%, and 68%, respectively,ö Cerulli says in a report. ôThis has coincided with, and to a large extent been propelled by, the bull run of the Indian stock markets. Sensing exciting times ahead, a number of international asset managers have signalled their intentions to enter the fray.ö

Cerulli expects the Indian mutual fund market to see an 18% compounded annual growth rate over the next five years, and while that may appear modest compared to the recent past, it is understandable given expectations of low growth in most global asset management markets.

A strong domestic stock market, growing investor awareness, and greater mutual fund penetration in India have helped boost assets under management (AUM), and this trend is expected to continue. A reduction in asset churning, ôthe bane of the Indian mutual fund industryö, according to Cerulli, would go a long way in helping build a sustainable fund market in India.

The international asset management community is well-represented in India, and Cerulli expects this to increase as more global asset managers seek to build a business in that market. India has 33 mutual fund managers with 16 joint ventures and three wholly owned foreign asset managers.

Indian fund managers have been very aggressive over the last two years. The largest fund manager, Reliance Capital Asset Management, has considerably outpaced the market in its asset growth. The industry AUM grew about 70% in 2007; Reliance by 119%.

ôAsset gathering skills and product performance are far more important than the pedigree of the asset management company,ö Cerulli says. ôForeign fund managers cannot rely solely on their international brand to make an impact in the Indian marketplace.ö

Cerulli believes the total number of asset managers in India could rise to as many as 50 in the near future, with many of the new entrants coming from overseas.

India as a destination for international investors has proved to be lucrative for the fund management industry, but raising assets from Indian investors for international investing has been a far tougher nut to crack. Cross-border funds û mutual funds registered in international jurisdictions û are not yet allowed for sale in India. Local funds investing overseas are permitted, subject to an industry-wide ceiling of $7 billion, up from $5 billion in September 2007.

ôNotwithstanding the increased industry-wide limit, the assets of mutual funds investing overseas have barely crossed $2.5 billion,ö Cerulli says. ôHigh domestic returns have not given investors any reason to look beyond Indian shores, although 2008 could change some of this domestic-only hubris.ö

In 2005, Cerulli became one of the first international research firms to conduct proprietary surveys of Indian asset management firms, and its coverage has increased every year to reach over two-thirds of assets under management at the end of 2007.