 
Prashant
Jain ANOOP
BHASKER RITESH
JAIN |
The future of New Funds Mutual
fund experts debate the cost-benefits of new fund offerings in their
current avatar, and give a glimpse of the future. GOVINDRAJ ETHIRAJ: Let me introduce our panelists – Abhay Aima, country head of private banking, HDFC Bank; Ved Prakash Chaturvedi, CEO of Tata Mutual Fund; Dhirendra Kumar, CEO of Value Research (India); Sameer Kamdar, national head - mutual funds, Mata Securities; Sandesh Kirkire, CEO of Kotak Mahindra Mutual Fund; and finally, Naganath, president and CEO of DSP Merrill Lynch Mutual Fund. Also, I have with me N Mahalakshmi, our Markets Editor who will lay out the statistical framework for today’s discussion, apart from providing insights into the more complex understanding of the industry. N MAHALAKSHMI: Looking at the fund mobilisation data since January 2005, it is clear that despite the plethora of new fund offerings and the huge sums these funds collected, the industry has seen net redemptions (read page 22 for the detailed background and statistical framework). If the objective is to grow this business for the long term, then it is clearly not being met. A bigger concern, however, is that the investor interest seems to be in conflict with the industry’s. We will discuss all these issues one by one. Tata Mutual is one of the fund houses that have been fairly aggressive in launching new fund offerings, so let us start with Ved Prakash. Can you please tell us what has been the guiding principle behind the launching of so many new products? VED PRAKASH CHATURVEDI: I can hardly speak on behalf of any particular fund house. I would rather speak on behalf of the industry. Let us look at it from a 20,000-foot view. The only question to ask is, is it in the interest of investors? I think, like a coin, there are two sides to the whole thing. First, if there is already a fund that meets the investor requirement, possibly there is no point in coming out with a new fund offering (NFO). But, I don’t think the industry has gone that way. Again, look at it from another perspective. Most funds that are doing well today and have rewarded investors were at some point of time launched as NFOs, weren’t they? So, the answer to your question is very simple: if there is a new product idea; if there is a structure that enhances investor’s wealth creation along certain new lines; and if there is, for example, a regulation now that permits new kinds of schemes – whether they are derivative-oriented or they have a more thematic kind of orientation – which were not permitted earlier; I think it makes sense. But, if it is just another vanilla scheme, like the ones you already have, may be it does not make sense. Lastly, it has become fashionable to criticise NFOs. Let us envisage that over the last three-four years, no NFO has been floated. And that too, as per the statistics you quoted, against the backdrop of hardly any money coming into the existing schemes. NFOs or no NFOs, the fundamental issue remains: In an environment like India, where the market is doing so well, why is the investor not coming in? And as long as this issue is not addressed, these debates will keep going on. GOVIND: Dhirendra, can I get a kind of external view? DHIRENDRA: I really don’t take his point. It is simply a chicken and egg story. If you keep supplying NFOs, and your whole marketing focus and your whole business focus is around that, it does not help. The real issue is not that NFOs are bad. It is that the interests of investors, intermediaries and manufacturers do not converge here. Basically, it is a business growing at the cost of the investor. NFO is an easy way out. There is an all-pervasive myth that buying a new fund at ten rupees is cheap, and you don’t demystify it because that involves hard work. GOVIND: Okay. Naganath, Dhirendra has raised a more fundamental point. He is saying you are taking an easy way out by dumping more and more new funds into the marketplace. MAHALAKSHMI: Actually, Naganath has not launched a new fund and may be a wrong person to ask that question! NAGANATH: As Mahalakshmi said, since May 2004 we had not launched a single fund until last week. We continue to market our existing funds. But let me make some general comments. If you look at the international scenario, particularly in the US, you find large fund house complexes that manage $300-500 billion but have not more than, say, 100 funds in their portfolio. The aim is obviously to achieve a certain sharp degree of product differentiation between one and the other and to grow them. I think as an industry we ought to do the same. Because if we don’t, then not much attention is paid to the track record of the existing funds. MAHALAKSHMI: Sandesh, what do you think? SANDESH: I think it’s all about the ten-rupee myth. That is the bottomline. So, we do need to demystify the concept to the investor. SAMEER: I agree with Sandesh. There is a very strong tendency to gravitate towards anything which is ten bucks. Much as our team tries to explain to them (investors) that it doesn’t really matter because the valuation of the scrip happens at the same price and there is no discount, it doesn’t sink in very easily. Indeed, the ten-rupee myth is a huge stumbling block. ABHAY: I think everyone would agree, the tendency to get something at ten rupees is as bad as a disease. And, everyone has to share the blame equally. Both the manufacturer and the distributor need to do much more in this aspect. But, in life, we tend to follow the path of the least resistance. I would reiterate both the manufacturer and the distributor are equally responsible. But this is not to say that the investor can get away. Someone needs to tell the investor that if you are putting in one lakh rupees, you spend much more time before you decide on a pressure cooker or a fridge, you should take that much time in understanding your investments. That is one aspect. The other aspect is that the blame lies equally with the distributor and the manufacturer in terms of education. Equity is still being treated as speculative class. So, for the concept ‘When do I get in, when do I get out?’, NFO becomes a handy tool. In private banking, for example, considering the cost involved in acquiring a customer, if I lose him in a year, I will actually make a loss. So, all of us need to realise that we can’t take a short-term AUM-related stand. There are pressures, Mr Chaturvedi would have Tatas breathing down his neck: Why is the AUM low? Or for that matter, Sandesh would have with Mr Kotak asking: What has happened to the AUM? You cannot get away from that – these pressures are part of the business. Mr Naganath doesn’t seem to have any pressure because Merrill Lynch is sitting somewhere else! You surely are answerable to your bosses. But you and your bosses need to understand that eventually mutual funds by definition are long-term play – both for the investor and the manufacturer. SAMEER: Having been in the industry for the last eight-nine years, I would say probably we have not made enough efforts. When I look at the entire mutual fund industry, I feel it is more like FMCG today. Today, the sales of Lux and Lifebuoy are surging ahead, but the issue is you have to spend much more on your brands... MAHALAKSHMI: So, is ten rupees really the issue? Because if that had been the issue, then why can’t funds just split the face value or give bonus issue every year or every quarter pretty much like how you declare dividends in liquid plans because it is more tax-efficient? Why can’t you have a system where you have low net asset value but with an existing fund, because after all it’s just an accounting entry? It then comes without the ill effects of an NFO – the associated costs and higher expenses.... SANDESH: That is not a solution. That’s, in some way, cheating the investor too. DHIRENDRA: I have a quick point to make. It amounts to actually educating the country how to calculate percentages. And, I think it is a tough call. PRODUCT DIFFERENTIATION MAHALAKSHMI: Now let’s talk about product differentiation. UTI, the largest mutual fund in the country, has about 16 equity diversified funds, followed by Prudential ICICI with about 14, Tata has about 11 and so on. And, these are all diversified funds. So, barring little differences in allocations across sectors, there doesn’t seem to be too much product differentiation. As an investor, I am extremely confused which of these funds to pick up? Abhay, do you find enough product differentiation in these? How do you advise investors? ABHAY: No, not really. I don’t think there is. Let’s face it, all of us get tempted by the easy way out. But the point that we all need to realise is that in the financial market, unlike the FMCG market, when you sell a soap, the sale ends there and that is the complete sale. Whereas in a financial market, when you sell a mutual fund, the sale starts there. The moment all of us realise this, I think our approach will change from being a FMCG kind of manufacturer or distributor to financial products market. DHIRENDRA: I fully agree there is a problem of plenty. It is a problem of attitude too. Then you have a lot of companies, which are in the majority and behave as if they have to hit and run – to make money. This is a wrong attitude because you are managing other people’s money. The whole focus of gathering assets quickly to be viable or whatever may be the pressures are, somewhere we have to strike a balance of conducting ourselves and building a long-term business, gaining longevity. GOVIND: Are you calling mutual fund managers “serial killers” because they keep coming back? DHIRENDRA: No, I would not like them to look like criminals. Because there is still a positive of the whole thing because at least people are saving and participating in equities. MAHALAKSHMI: Did you take a conscious decision not to hit the market with regular NFOs? NAGANATH: Well, firstly, as the fund was not comfortable with amortisation of expenses, which was happening at that point, we took a decision not to launch NFOs at that point. And, also to launch NFOs that fitted in with requirements of our product bouquet. GOVIND: Sandesh, how has the onslaught of the products in the market helped you? When you look back what you have launched – Mahalakshmi has given you the statistics of six schemes – which are overlapping one another, has it really benefited you? SANDESH: The industry has benefited from corpus growth through NFOs. But now things are changing. Frankly, as a fund house, we have had fairly clear product differentiation – be it a thematic lifestyle launch or a contra launch. HOME Business Standard • FUND MANAGER • October 2006 |