'The onus is on us now'

Last Updated: Fri, Dec 07, 2012 21:00 hrs

pAfter a tough phase the mutual fund industry is breathing easy The question is whether investors will also do so Secondly mutual funds have a 25 year old history yet less than 3 per cent of household savings get invested in them compared to around 41 per cent in fixed deposits Obviously fund houses want some of this money to come to them but will they be able to do that What is holding mutual funds back Do they finally see light at the end of the tunnelppHeads of six leading mutual funds participated in the Business Standard Fund Cafe on the challenges ahead The panelists were Milind Barve Sundeep Sikka Nimesh Shah A Balasubramanian Jaideep Bhattacharya and R Venkataraman The Round Table was moderated by emShyamal MajumdaremppstrongModerator strongThe smiles are back on the faces of mutual fund CEOs courtesy the government and the regulator Will you be able to transmit that smile to the faces of investors as wellppstrong Milind Barve strongOne of the objectives Sebi has recognised is how to increase penetration This is a obvious problem for the industry as the percentage of business from small towns is significantly low What Sebi has done is extremely innovative A reasonably high amount of incentive can now be paid to distribution for getting business through small towns in a manner that affect the economics of doing business for the AMCs The key thing is that we have to just make people aware that there are a number of fund products which are actually quite simple and low risk So the challenge is to create awareness We are now going to put Rs 150 crore at an industry level towards increasing it and at least over Rs 100 crore will be spent on improving penetration I think these are meaningfully large amountsppstrong A Balasubramanian strongWhen we talk about mutual funds the product that generally comes to the minds of people is only equity as an asset class It is not necessary that equity is the only asset class that gives solution to investors It has to be a right combination of equity and hybrid asset classes More energy and time would be spent on making the concept more clear about investing in mutual fund rather than talking about a specific productppstrong Sundeep Sikka strongThe smiles are back yes but I think more responsibility lies on the industry now because the regulator has done what it had to do It has given a clear roadmap Now it is up to the industry to go to the next level because I don&rsquot think we can go back to the regulator and ask anything more at this point of timeppstrong Nimesh Shah strongI see the topics that challenges an AMC are constant I think challenge is always of fund performance Whatever be the environment as long as you see anybody who has given us strong relative performance their business has done well We should be able to justify our existence by consistently beating the benchmark and that&rsquos what our endeavour should beppstrong Jaideep Bhattacharya strongFor me it&rsquos a game changer After a long time you have seen that the interest of key stakeholders in this business is being looked after From the stakeholder&rsquos perspective I think the regulator walked five steps ahead to essentially see that all of us have something on the table Second thing we need to look at is how do we actually move away from NAV-based selling to goal-based selling A lot of times the goals are 15-20 years ahead but we still talk about one-year and three-year performanceppstrong R Venkataraman strongThe market peaked in January 2008 and since then I think smiles briefly appear and they keep on disappearing So last time people started smiling again was in the middle of September or thereabouts There are two aspects of investing &ndash one is the long term nature of investments and the second is disciplinary action of investing This is a point of inflection because regulatory uncertainty also has been removed If luck supports us I am sure the state of the investment would be different in the next five yearsppstrongModerator strongOne question that keeps on coming up and the regulator has also raised this issue quite a few times is that whether we have too many AMCs We already have 44 out of which only the top five perhaps are making profitable growthppstrongSikka strongIn the US there are more than 4000 AMCs In my mind there is a case of a hundred more AMCs because the industry is going to grow five times from here in the next 10 years Please don&rsquot see it as next 12 months this business is about annuity As long as you have a business model as long as we are having the right products as long as we have the investor&rsquos confidence the industry will grow and more and more AMCs will become profitableppstrongShah strongIf you are the only AMC in a small town your business is &lsquoX&rsquo we have seen two-three more AMCs coming to that same town the awareness increases and your business actually goes up with more AMCs coming into that town It is not the question of how many AMCs are there The issue to look at is how many are serious pan-India playersppstrongSikka strongIt is very important for us today to keep the cost low to reach out to use the right technology at the lowest costppstrongBala strongSome players have moved out of the industry new players have come in There are some who don&rsquot have so much commitment to build a MF business model At the same time new guys are also seeing great potential That&rsquos the trend we could see going forward The industry is evolvingppstrongModerator strongBut do you think the entry barrier for the mutual fund industry is too lowppstrongBarve strongIt is best left to regulators than any of us in the panel But it is important that if we have people who are not indulging in practices that are unhealthy The entry barrier you refer to is very low It is just Rs 10 crore capital which sometimes a handful of individuals can put But I don&rsquot think the number is an issue The real question is are you serious or not I think the reference to seriousness is whether you are committed to creating a good long term business modelppstrongBala strongLow capital requirement has to do with the fact that the industry which has got a pass-through effect which essentially means the risk portfolios are borne by the investors That is one way of looking at it Also there are a lot more regulatory restrictions that have come in portfolio construction which removes the risks which otherwise existed in the pass-through effect One also has to look at it as an opportunity for somebody who is serious in this business who has a long term track record and who can showcase it to the public and the marketppstrongBhattacharya strongCapital is going to play a very important role in strategy But everybody doesn&rsquot need to have the same strategy Everybody doesn&rsquot need to be present in 250 cities of the country or have international presence some could just be boutiques So there is enough play for everybody in different formats and for people who are in the market as well as trying to enter the market I think all of them are working on a unique strategy as far as India is concernedppstrongModerator strongFunds have underperformed their benchmarks in the past few years Even in the recent rally 23rds of equity schemes have underperformed What is the real problemppstrongBarve strongI am very disappointed with the observation because you said &lsquorecent&rsquo market rally A fund can&rsquot be judged by what it did recently In the last six months the market has gone up by about 78 of which 75 move came in September Evaluating funds&rsquo performance on the basis of how it did in the last one month is not fair to the fund manager But I agree with you with the fact that people tend to look at recent performance and react to it It is normal human behaviour They tend to come to conclusions which unfortunately are not appropriateppBut if you look at SEBI-compiled data 76 of the funds have outperformed the benchmark in value terms over the last three years Yes in the last 3 6 or even 12 months maybe outperformance has been a challenge But if we are looking at longer period investors will be happyppstrongSikka strongBroadly one of the biggest problems of this industry is that its success is just measured by two things viz assets under management AUM and returns of the scheme This industry is much more than AUM because AUM is reflective of a lot of institutional money and scheme performance of 6-12 months which is again a reflection of just getting the portfolio right was it right for this recent rally as you put itppThe way is &lsquoawareness&rsquo and &lsquoeducation&rsquo The awareness even for the existing investors is that you will have to highlight not about 6 months or 1 year It is about a track record you will have to see how the fund house has performed in different cycles That experience is going to play a very important role People should not get carried away with the performance of the last 6-8 monthsppstrongBhattacharya strongLet me just add to the tenure part When you see the index for the last 25 years the index actually gave you between 14-16 returns out-liers being 7 and 27 When you compare that with the other asset classes which are available you don&rsquot find too many which have matched this Secondly in a country like India where you have high inflation no fixed income product will be able to beat inflationppstrongSikka strongI would like to give an example because we keep comparing everything short term Three to four years back there was a flat which was sold in Mumbai and newspaper headlines said &lsquoThe most expensive flat sold at one lakh rupees a square feet&rsquo Three years back the cost of the flat bought in 1972 was Rs 35-40 crore But when I calculated the IRR internal rate of return it was coming to 13 which is what Sensex has given The top 5-10 schemes which have got a track record of more than 15 years have given a CAGR of 20 If somebody had invested in any of those it would have been Rs 70 crores So it is more to do with &lsquoawareness&rsquo and that is where the biggest challenge lies in IndiappstrongModerator strongSEBI has come out with new incentives for non-metros Will they be enough for mutual funds to tap investors in smaller towns where business actually lies Do you think what SEBI has done is enoughppstrongBhattacharya strongThe top 25 cities account for about 92 of the total AUM There is a lot of wealth being created even outside the top 25 cities and they should have access to the best products and services some of which are offered by mutual fundsppSecond thing from a portfolio perspective non-metros&rsquo churn rate is much lower So mutual funds get better stability when these products are sold outside the metros Also your cost of acquisition is much lower than what we sometimes pay for acquiring in the metros The 30 bps incentive is a guidance essentially to build capability in the tier 2 and tier 3 markets But from a portfolio perspective I will be happy with 30-40 coming from outside the top 15 citiesppstrongBala strongThe industry has been growing through its own branch network and some of them of course have expanded and some haven&rsquot This has definitely opened the door Secondly if you look at the service providers like CAMS Karvy to the industry they themselves today operate about 250-260 branches which also essentially means the network comes to play in terms of how do you effectively utilise it Lastly look at the population of the distribution community it is only about 40000 IFAs The regulation is attempting towards helping the industry in getting more financial advisors for selling the simplified performing products This is where I think the multi-pronged approach is necessaryppstrongModerator strongOne of the plans that SEBI came up with and is much talked about is the direct plan and in which the schemes must allow investors to invest directly But distributors fear that this will take away a large chunk of their business and will bring back the unhealthy practice of clients getting kick-backs from agents Do you see this as a serious concern And how can this be addressedppstrongSikka strongIf we divide this in two parts there is the institutional corporates and the HNIs and retail I will address the retail and HNIs part Look at the performance the industry has given return of 13-14 CAGR The top 10 schemes have given return in excess of 25 and the bottom 10 about 2-3ppDistributors are in a far stronger position than they actually think they are I don&rsquot see that a lot of investors will stop dealing with the distributors because they do play a very important role The fund performance and the schemes will keep changing and investors will keep going back to the same distributor But like I mentioned it is not a static thing that once the investor has invested he doesn&rsquot have to look at his portfolio Given the large number of schemes over 300 equity schemes there will always be a need for which the investor will keep going to the distributorppstrongVenkataraman strongOn the institutional segment there will be some kind of discontinuity From the retail and HNI perspective there are two elements of this transaction or the relationship the distributor has with the customer One is the researchadvice part where he gives some advice And the second thing which people forget which is much more larger is housekeeping &ndash redemption giving statements changing POA changing bank accounts etc It is rare that an investor does not change any of his details or the relationship with the fund house So clearly there is a role or relationship between the investor and distributor So at least for the short term I don&rsquot think there will be any significant impact The business will not suddenly fall off the cliffppEvery intermediary has to add value If he does not add value he will become extinctppstrongModerator strongSEBI has already talked about a long term policy for mutual funds because too much of a dynamic regulatory environment doesn&rsquot do good to anybody If you were to suggest two areas to the regulators what would that beppstrongBarve strongI don&rsquot know whether it is to be addressed to the regulator but clearly it needs to be addressed to people who make tax laws In our recent meeting with the finance minister we made this point and I hope it will be accepted when the time is right to consider It is very important that financial investment products essentially savings or investment products with broadly same criteria or features should get the same tax treatment irrespective of the manufacturer insurance company mutual fund or under NPS If we are provided with that level playing field then we can make a meaningful contribution to generating long term savingsppThe other thing is stability in the regulatory regime In India nothing incentivises investments as much as tax incentives We have a history where certain investment products have grown only because of tax incentives and the fund industry deserves those incentives on a level playing fieldppstrongSikka strongHow do you take these mutual funds to the retail investors in smaller cities This needs to be captured in the policy whenever it comes Tax breaks have already been covered I will like to just touch on one thing which is more of communication strategy The idea is to make it simple for the investor and in a language which the investor understands SEBI has already done a lot of other things but education and awareness should be one of the important things in the road mapppstrongShah strongThe process of investing in mutual fund needs to be simplified If a bank has got complete details about an individual when I apply for a mutual fund can I just add two more rows viz which fund and how much If we apply our mind the on-boarding process can become very easy for somebody to invest in mutual fund Let&rsquos decrease our costs so that the final investor benefits out of it and then the industry will also do wellppstrongBhattacharya strongWhat we are seeing is that essentially a person might be a very successful professional but might not know the basics of financial planning One thing that I would like to be included is especially in the secondary school chapters on financial education Second thing is liberalising third party investment mandates especially for the pension and the insurance baseppstrongVenkataraman strongThe biggest thing is to give the industry a level playing field We have new pension schemes life insurance and mutual funds and everybody agrees that the retirement pie is the biggest available So it is extremely important for all the players to have a level playing field with the rightsame kind of fiscal incentives so that nobody is put at a disadvantage If that happens I think the industry will have a great futurep

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