Create level-playing field for MFs

The CEOs of India’s biggest mutual fund (MF) houses are confident long-term inflows into equity schemes will not be impacted by intermittent market correction. That was the consensus at the Business Standard Fund Cafe in Mumbai on Tuesday. The top honchos of five leading fund houses said the industry should not shy away from going down the credit curve when it comes to debt investment as long as risk calibration is taken care of. In addition, they spoke in length on many crucial issues as well as potential disruptions that could have a lasting impression on the industry. Excerpts:

On the required change in regulatory landscape & level playing field… 

Nilesh Shah, CEO, Kotak Mutual Fund: In some sense for the MF industry, competing with other financial products is on a non-level playing field. For instance, in gold coin or jewellery, the distributor margin is 30-35 per cent and this is assuming the jeweller is giving 24 carat gold for 24 carat price. There could be surprise there also. And you can make the payment in cash. The customer does not need to do KYC. Many jewellers will facilitate KYC by borrowing PAN card available with railway reservation list. We (MFs) don’t do any of those things. This is a non-level playing field. We have our constraints and within that we deliver what we believe is fantastic performance. Hopefully, one day there will be one common level-playing field across financial products. If you are buying gold, do KYC, buy through credit card or cheque. Then we will see who puts money where.

Sundeep Sikka, ED & CEO, Reliance Mutual Fund: In advertisements, mutual funds are not allowed to say that, for instance, Rs 10 given to a scheme 20 years ago has become Rs 800. Also, direct comparison is not allowed. For example, ETFs (exchange traded funds) are launched on indices. I am not allowed to give advertisements saying that Reliance ETF beats fixed deposit (FD) returns, whereas an exchange can advertise saying that its benchmark index has beaten FD returns. 

DP Singh, ED & Chief Marketing Officer (Domestic Business), SBI Mutual Fund: We see more investors from B15 geographies. But probably this is a time to reconsider B15 incentives. We are increasing the cost for B15 investors and we are charging money from consumers of major towns and passing on the distributors of B15 towns. It is not going to the investor.

On the problems of commission cap and high expense ratios…

Leo Puri, MD, UTI Mutual Fund: Globally, embedded commission in financial products is coming under attack from regulators and policymakers. I am not arguing for removing it. But, it is something we have to prepare for. 

Milind Barve, MD, HDFC Mutual Fund: From the data, it is not right to conclude that TERs (total expense ratios) are necessarily high. Where do you start keeping a tab on TER? It is basically when you have either achieved optimum distribution or if high TERs are hurting performance. The NAVs (net asset values) are computed after accounting for the TERs. And if funds are performing and generating 5-6 per cent outperformance consistently in spite of the so-called high TER, then it needs to be judged differently. 

On the increasing role of technology in the sector…

Shah: Technology can create disruption, taking over jobs of fund managers and distributors and the way we do business. But India is a heterogeneous market. There’s one section of the society that is taking to technology faster than the rest. So, we must adopt technology that can help us reduce costs and expand business. 

Barve: Investment is still an art. While technology can play a big role, we still need the likes of a Prashant Jain, a Nilesh Shah or a Sunil Singhania. 

Puri: There is an element of art to fund management, but it’s just a matter of time before automation seeps in. I see it happening in the next 2-5 years, and not 10-20 years. We need to welcome it as it would allow our industry to grow. 

On ETFs being the way forward…

Sikka: Over time, low expense ETFs will be the rule of the game. ETFs have grown in a big way and before long they would catch up in India, too. But different investors have a liking for different products. We need to offer those options for financial planners and investors to choose from. With the regulatory push towards advisory services, ETFs will become a bigger product.

Barve: The real question is: who are the investors? Investors decide what they want to invest in. In India, we do not have meaningful participation of retirement and pension funds, investors who typically choose this product. Low cost active management will be the winning formula.

On declining inflows into equity schemes in the first half of 2016…

Shah: The normal investor tendency is to book profits. So, one set of retail investors is booking profit. Another segment is probably putting in Rs 3,000 crore every month through SIPs, which is providing stable inflows. A third set which is the more HNI kind is keeping the faith and remaining invested. So I am not too worried about the flows. Some money has shifted from pure equity funds to balanced funds which typifies mature investor behaviour. If markets correct, my guess is that we will see more inflows into pure equity funds. 

On concerns about debt funds investing in lower-rated papers for higher returns…

Puri: Mutual funds have to participate in products that will offer customers the yield that is possible from corporate debt. If corporate debt markets are going to evolve, you will need issuers beyond the top 10 or top 20. We can’t step back simply because we will have an issue which may arise on a particular issuer. In fact, it’s our job to deepen the capital markets, while doing the necessary risk calibration.

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