BS Fund Cafe: Credit events may not halt MF industry's growth, say experts

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Why are investors disillusioned with mutual funds?

Milind Barve: The biggest challenge is that the coverage of mutual fund industry is focused so much on what has happened last week, last month, last two quarters, it seems there is little coverage about what this industry has delivered in five, eight and ten-years or longer. If you look at the Rs 25 trillion industry, about Rs 10 trillion roughly is in equity funds and Rs 15 trillion is in debt. The so-called stressed exposure in the industry is no more than Rs 15,000-Rs 18,000 crore. But, the decibel level of conversation around these stressed exposures, which is in a handful of funds or in a handful of fund houses is disproportionate to the real problem. 

Over the last three-five years, the industry has delivered good returns in spite of recent credit events. So, it needs a different way of looking at how things are unfolding now. If you look at July for example, the equity flows have actually increased despite the sharp correction in the markets. So, there is a difference between what people say and what people are doing. This doesn’t talk about lack of confidence or suggests that people are losing faith. Yes, we have had some challenges. If you look at one-year returns, they might not look so good. Again, I am not surprised that over three to five-year — medium-to-long-term returns — have been quite strong. People who have experienced that are not complaining. 

Have the recent events really been blown out of proportion?

Sundeep Sikka: As stakeholders, all of us are responsible for the growth of the industry. It is not just about the mutual fund industry. Ultimately, we are contributing to the country’s capital formation. In hindsight, it is easy to analyse things. Firstly, there are certain amount of stressed assets. Could we have done better? Yes, the answer is we could have done better. If the investor loses, do we feel nice as an industry? The answer is no. We always want investors to get better returns. It is human psyche that one always tries to see what has happened in the immediate past. However, the investors are still coming in spite of all this noise. But, it is also important to highlight that it is not like we have not done anything good for the industry. We have created a lot of wealth for investors over the last 20 years. As long as we learn and don’t repeat the same mistakes, we are all doing a good job. 

How do you expand the base, penetrate rural India?  

 
Ashwani Bhatia: There is no doubt that the opportunities are there. We as a fund house have just penetrated 1.5 per cent, so the potential is huge. If you go to the smaller towns, they do want to experiment. We are seeing traction, we are seeing growth. Whether it is State Bank of India’s zonal offices or regional offices, everyone is going to contribute. When we meet here next year, you will also be surprised by the set of returns.  

What’s your view on the state of the industry and is there a need to restore investor confidence?

A Balasubramanian: The mutual fund industry has gone through many ups and downs. After every bad period and downturn, it has come back. Regulators have stepped in to make the system stronger. That is how the industry has evolved. In 2013 when D Subbarao was the Reserve Bank of India (RBI) governor, he increased the rates and also the corridor for liquidity adjustment facility. This created a panic in the market. The RBI measures pushed rates on short-term money market instruments prompting redemption in short-term debt fund schemes. For the first time in the industry’s history, liquid funds gave a negative return as the net asset value (NAV) fell by one per cent on an average. 

People started calculating backwards on an accrual basis and concluded that they would recover the loss in 30 days, and that while it was bad for a day, the situation would improve soon. Similarly, even now it’s evolving as we move forward. It is still only 2.2 per cent of the unique investors who invest in mutual funds. Even if we look at 30 per cent of the households, we have a long way to go. The problem we are witnessing in the mutual fund industry is related to the overall financial system and in that respect it is rather small. 

Nimesh Shah: One particular exposure (Infrastructure Leasing & Financial Services) had Rs 90,000 crore of liability, and the AAA-rated paper became D. Mutual fund industry is valuing its portfolio at 25 per cent on this exposure. Across the industry, the valuation is either zero or 25 per cent. So, only Rs 4,000 crore (the mutual fund industry exposure) of the Rs 90,000 crore, is marked-to-market. How have other institutions (banks, insurance, provident funds) valued the rest of the Rs 86,000 crore? We are the only industry which has marked to market this exposure. All the noise of the media is on this portion, which is marked to market. However, that is the strength of the mutual fund industry, the way it is regulated, the way it is transparent. Our NAV reflects the value of the investments. As Bala said, we are proud that we gave negative returns four years ago, for a day. 

Is the industry paying the price for its transparency?

Nimesh: On the issue of credit risk, someone said that mutual funds have walked away with a crime. I don’t understand this. If you have given money to an A-rated company, what is the definition of an A-rated company? There is a probability of default. Crisil also defines it. In this case, there is a 5.4 per cent chance that there could be delay or default. What is so surprising and criminal about it? It was disclosed in the portfolio that it was A, AA or AAA-rated company. If in the case of IL&FS, the total exposure of the industry was Rs 4,000 crore out of a Rs 90,000-crore balance sheet, is it success or failure of the industry? Some mutual funds would have lost some money in some debt schemes. But, there are blanket statements that mutual funds have a problem. 

What is your reaction to the issues of the mutual fund industry?

Nilesh Shah: Our job is very simple. We have to make our investors wealthy. Our job is not only to manage money, but also manage trust and confidence of our investors. Over the years, we have seen that communication, transparency and conduct brings trust. Mutual fund industry has tried to adopt global best practices and also best practices within the country on these three parameters. Today, India is a heterogeneous market. There are sets of investors who are giving us the money. I was coming in a Delhi Metro and a person stood and offered me a seat, stating that I give good advice. The behaviour shows that we have got something right. Our job is to prove with our conduct that investors can trust us. If there is a deficiency, we will correct it and continue to learn from global and local best practices.

So you don’t think there is any deficiency?

Nilesh: This is a question of evolution. When I started my career, gilt prices were valued based on brokers’ quotes. To me there was no deficiency. My superior told me that you are taking the quote from the broker, but someone could be influencing the broker and this is not fair. This does not increase trust and confidence. We worked and created an independent agency to provide prices. You might argue that the way one is valuing bad credit is not right, but please remember the situation in which one is valuing it. It is well-known that we have an illiquid market. Even for AAA-rated securities there is 25-50 basis points spread at times, but we have to value it at one price. Within the constraints, we have done a reasonable job. But if someone comes and enlightens us that there is a deficiency, we would be more than happy to correct it.

The Securities and Exchange Board of India is taking away all incentives for distributors, and there is growing mistrust between mutual funds, distributors. How this changing dynamic is affecting expansion?

Jignesh Desai: We have investors in more than 16,000 pin codes out of 19,000 pin codes and around 3,800 talukas out of 4,500 talukas. Over the last 25 years, we have tried to educate our advisors that you cannot do much about things that are outside your control, but let us work hard on whatever is in our control. How you behave in good times matters, but how you behave in bad times is also critical. So rather than complaining on what is not in our control, we have always tried to do what is in our hands.

What is the industry doing to attract millennials?

Sikka: Let me step a little back. Earlier, the industry could not penetrate much because physical penetration was very difficult. Now, technology has given us reach whether for operations, for fund management etc. For us as an organisation, 40 per cent of incremental transactions are happening on mobile phones. Millennials are also quite smart. While most think that they are only consumption-oriented, I have a different view. After getting a job, my nephew asked me not what mobile phone he should buy, but how he should save for the future. So, they are much smarter than people of our generation. When I got my first salary, I did not think of a systematic investment plan (SIP). 

How does technology play a role in distribution? 

Desai: If you need to invest Rs 10,000 in five funds in an offline mode, you will need to give us five cheques for five fund houses and similarly for redemption. However, technology can allow you to do the same through a single cheque. Similarly, just like you have the flexibility to sell individual stocks in your demat accounts, you can do the same with mutual funds. If you want to sell some schemes of one fund house and buy schemes of another, you can do that through the mobile application. For servicing too, you can access your account through your user ID and password and there are more than 40 types of reports that you can generate to see how your fund is performing and calculate your tax liabilities etc. We also have a platform for advisors where they can monitor their client portfolios and generate multiple reports.

Have you done any analysis of investors?

 
Desai: Around 52 per cent of our investors are with us for over the last ten years. The biggest challenge we see right now is that there are not many young advisors. We have more than 32,000 advisors but very few of them are young. Unfortunately, as an industry we have not been able to promote mutual fund advisory or distribution as a career option. There is a huge scope, but people are yet to accept it as a career opportunity.

Tell us about the role of technology and behaviour of millennials. 

Nilesh: I am not able to connect with my daughters who are millennials. But this is one generation that is far more conscious due to availability of knowledge. Millennials have a reasonable share in the incremental flows that are coming into the industry. In terms of assets under management as well as number of investors, it is not that large. Millennials who have come through distributors have continued their SIP. We are seeing some redemptions from those who have invested directly as the current carnage is testing their nerves. There is a need to reach out to them and ensure that they remain committed. 

What is your view on the KYC (Know Your Customer) process?

Balasubramanian: Technology can help on that front. The mutual fund industry created this system of KRA (KYC Registration Agency). I think it was one of the best system created by the industry. It was equivalent to the universal KYC that the government is creating, except that this is only restricted to mutual funds. Secondly, every mutual fund player is trying to improve their technology and capability and trying to adapt to the mobile platform. Also, there are innovative fin-tech distribution platforms that are coming on board.

While mis-selling is going down, were risks not explained properly on the debt side?

Balasubramanian: Some examples of mis-selling in the industry were cases where people looking for income products, were given equity products. Overall, mis-selling is the least in the industry. Coming to your question about debt products, the largest component for calculating NAV of a scheme is interest accrual, second is interest rate fluctuation, third is credit rating and fourth is default. The default is only some percentage of any portfolio. When mark-to-market happens, it does impact the NAV on a single day, but if you draw the line over a period of time, it gets recovered. Having said that, people have to keep in mind that there could be some loss in income.

How are you using tech in reaching out to people? 

Bhatia: The Aadhaar-based KYC system for the mutual fund industry was good. Later, there was a Supreme Court judgment and we could do nothing about it. But that came in the way of digitisation. Eventually, things will be more technology-driven. The way we open a bank account and transact is completely different now. I have not entered a branch for years. On millennials, when I first asked my daughter to invest in mutual funds, her first reaction was “Dad, I don’t want to save. I want experiences”. With great amount of convincing, she finally opened an account. She was introduced to an app. Now, every other day she asks why my NAV has gone up or down. It has got them addicted. If we are able to do that well, we would have progressed in our journey. 

We need to take Amfi’s (Association of Mutual Funds in India) old message forward from ‘Mutual Fund Sahi Hai’ to ‘Mutual Fund Kya Sahi Hai’. We need to make people aware about which mutual fund product is suitable for a student and a salaried or a pensioner. Still a common man thinks that a mutual fund is only equity. If you look at all the categories, a saving fund is better than a savings bank account. A SIP is better than a recurring deposit. A fixed maturity plan is better than a fixed deposit. An equity-linked saving scheme is better than a public provident fund. If we can put across this message to all customers, the industry will go a long way. 

Barve: My sense is that technology is very important to make the transaction seamless. But if you are looking for advice on what you should buy, you would need an advisor or a distributor to get into the right product. One should not get carried away by technology and end up choosing a wrong product on an online platform. First, be sure what you want to invest in and then use technology to know more about the product. There are a lot of fintech companies in places like Bangalore, which are growing very rapidly. I met one of them recently and was really surprised by the number of transactions they are doing in a day and the number of new customers they are adding. 

There are two distinct characteristics I came across. One is that the average age of their customers is distinctly younger. They are the millennials. The ticket-size of investing is relatively small. This is understandable given that they are beginning their career. And they are fairly stable with their investment behaviour. They don’t shift and churn rapidly.

 


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