BS Fund Cafe: Biggest challenge is not to sell negative experiences in MFs

Banks should go for more defensive products: Nimesh Shah, MD & CEO, ICICI Prudential Mutual Fund

Top mutual fund CEOs say that even as the industry’s assets have touched a record Rs 20 lakh crore, they need to improve penetration, communicate the product attributes more effectively and strengthen the hands of distributors’.

For the mutual fund industry, acche din seems to have already come as annual assets grow at 25 per cent and mutual funds become a key part of the investor’s portfolio. Is this growth sustainable?

Nimesh Shah: What we see now is that flows are coming from all across India. And the flows look quite sustainable because there is no alternative. With interest rates coming down and lack of confidence in real estate and gold, money is moving to financial assets. Mutual funds have also become a core part of banks’ delivery mechanism. Today, there are many more investors in the market than the number of people serving them. So that’s the challenge. Otherwise, the flows look quite sustainable. 

Sundeep Sikka: The acche din for mutual funds have just started. Besides real estate, gold and interest rates coming down, the second big contributor is demonetisation. The kind of growth that the industry has seen since November last year was never expected. The total size of the Indian mutual fund industry of Rs 20 lakh crore is roughly about $300 billion. There are 67 asset management companies in the world, which individually manage more than what the entire Indian industry is managing. So we still have a long way to go. Another thing is that while the industry is at an all-time high, the folio count remains almost the same. Even at the peak of 2008, the folio count was 50 million and today we have 50.5 million. For me, the penetration has not increased to that extent. 

Over the past five years, debt funds have become very prominent. It’s important that, as an industry, we realise that a lot of new people are moving from bank deposits. This debt money, which is coming into the system, has to be managed very differently because many investors do not understand the risk. For me, these are the two things — we need more participation from retail and debt flows have to be managed carefully. 

Do you agree that the retail investor base has to widen? 
 

Radhika Gupta: What is encouraging today is that there are 40 asset management companies (AMCs) and more are joining the industry. The retail penetration and overall penetration in India is very low. I think it’s four per cent in mutual funds and 11 per cent on overall equities, respectively. So this is not about fighting for the existing pie. It is about expanding it to a much bigger pie. And there is probably room for another 20 players in this industry. The financialisation of assets is so vast that whether there are 10, 15 or 40 of us today, I think India poses a fantastic opportunity for all of us.  

While there has been a huge rise from B-15 towns, there is also this talk of looking at people below a certain income. Besides rural poor, we also have urban poor. Though the focus on B-15 is good, why not segregate it on the basis of income rather than geographical distribution? 

Anuradha Rao: It’s really a victory for the industry, as a whole with the support of the regulator, that we’ve been able to move away from the top cities and see the kind of penetration that we have achieved and are continuing to achieve on B-15. To my mind, since you are talking about smaller ticket size, and I interpret your question as coming from a financial inclusion point of view, I think it’s really, really important to get the messaging right. Then, we will not have to worry about B-15, T-15 etc. 

Coming to the messaging, we see a lot of ‘Sahi hai’ advertisements. But do you think the industry has failed in any way in this messaging, given the regulatory handicap that you have? 

Milind Barve: No. The first thing you must understand when you sell a financial product is that you must understand the audience to whom it is being sold. India does have an improving literacy rate but it’s not still fully there. The challenge is how do we sell a product to an audience, whom we need to communicate to in a simple manner. It has to originate not from the communication, but simply from the product. If your aspiration as a fund house or as an industry is that every Indian household should own a mutual fund product, then that product for every household is not the South Mumbai product. It has to be a product which is very simple. 

A lot of people are asking if there are enough stocks for mutual funds to invest in due to valuation concerns. The other side is, of course, the bottoming out of the economy. Growth is going to come. What are your thoughts on this? 

Nilesh Shah: Beauty lies in the eyes of the beholder. Let me just compare the last crisis or last bull market correction of January 2008 vs today. From a historical valuation point of view, we are trading just a little below 2008 levels but the 10-year yield was averaging eight per cent. Today, it is 6.5 per cent. So lower interest rates can justify higher valuations. 

Also, in January 2008, the previous three years’ profit compounded at 24 per cent. Now, the last three years’ profit is compounding at two per cent. In 2008, profit as a percentage of the GDP was seven per cent. Today it is three per cent. 

Thus, it is definitive to say that it is not a euphoria like in 2008. I don’t mean to say that there won’t be corrections in the market but a correction, if any, will not be as deep as it was in 2008. Will our equity funds come down if markets correct? The answer is yes. But if you give me sufficient time, will the investor experience be positive? I am quite confident about it. 

There are many distributors who earn below Rs 20 lakh and don’t need to register for goods and services tax (GST). But there is the question of claiming input tax credit also. Is there a disruption happening? 

A Balasubramanian: The Association of Mutual Funds in India, had an interesting discussion at the industry level, in which the top four accounting firms participated. We looked at the whole impact of GST and how it’s going to play out both from the manufacturers’ point of view as well as distribution. Then, we as an industry, got aligned and ensured that whatever we do actually gets conveyed to the larger community in the same way across fund houses. Second, GST is such a subject that anybody can interpret it in any way that suits them. At the end of the day, the law cannot be different from one to the other. Therefore, the interpretation also has to be uniform across the industry. From a system point of view, yes, it does increase the cost. But it’s not just unique to the fund industry. Earlier the service tax used to be at 15 per cent, now it is at 18 per cent. And the input credit that is available will be for anybody who is registered. We are encouraging the large partners to get registered. At the end of the day, one has to accept the fact the compliance will only increase. 

Mutual funds’ role in corporate governance seems to have improved but the overall impression is that the industry has been passive, unlike its counterparts elsewhere in the world. 

Leo Puri: The process of institutional participation in corporate governance is obviously a journey. You can’t go from zero to 10 overnight. And you accept the fact that this industry was very passive. I take our own example. We probably had 90 per cent absenteeism four years ago. Today, it would be three-four per cent. And typically we are voting in favour or against, which means we are applying our mind to resolutions and that’s one indicator of governance. The two important roles that mutual funds and institutional investors play in the capital markets are the efficient allocation of capital, and stewardship that is involved with corporate governance.  

There is a lot of talk about robo advisory etc. coming in. But then, distributors are also needed due to lack of financial literacy. What kind of balancing does the industry have to do?

Barve: I am a firm believer that technology, for the sake of technology, really means nothing. I think the simple thing that we need to do is to give this investor who has come to us a positive experience. That can be in two ways. First, we have to deliver what he has come to our product for, that is, the investment performance. There is an element of right selling or providing good guidance on what to expect from these products. An equally important part of the experience of investing in a fund is how his whole transaction flows through. What was his experience about filling up the form, completing KYC, if he got the account statement on time, or how his experience with redemption was. So that is what is going to give him the comfort to stay with the industry. 

The present number of distributors at 80,000 needs to increase manifold if the industry has to reach its goals. How do you incentivise a distributor amid all the regulatory issues? 

Sikka: The industry needs more distributors to service new investors. Going forward, one thing is very clear is that the entry load era is over. The revenue model, whether for the distributor or the AMC, will depend more on volumes rather than percentages. Even today, when you look at insurance, the industry has got 20 million agents. For us, even if the number is 80,000, the active ones are less than 10,000. So there’s a long way to go. 

Rao: We really need to work to strengthen the hands of the distributor, existing and future. One way of doing it is to reduce his cost, enhance his reach, and make it simpler for him to engage in his business. Every AMC today is trying to empower the distributor by providing him automated tools required to function, such as bringing in new investors, manage them, tackle large volumes and enable each one to handle much more. There is innovation in each version and each tool. But at some point of time, our costs and distributors’ costs would both have consolidated into a single best platform which can be used by everyone.

Puri: Distribution, as a concept, is not under threat. So, one has to be a little more analytical about where the real source of distress signals might lie. There is, of course, a global regulatory push to tighten standards of investor protection. And in that process, regulators do sometimes overshoot. I fear our regulator might just be in danger of overshooting a little, as regards the development of individual advisors and individual financial advisors. And that is, particularly, the source of stress. Many of us feel that we must find the right balance between the theoretical definition of what an advisor would do and the distributor. 

Do mutual funds with strong bank parentage get better traction?  

Balasubramanian: I don’t think that anybody sells a product just because the product comes from our own stable. But definitely you would have an edge over other players who do not have the backing. My experience with banks is that everybody’s product will be on the recommendation list, which is based on the “white list” as they call it. It’s purely on the basis of numbers, performance, track record and so on. 

Gupta: When a bank goes out there and sells its own internal asset management products, it’s a very logical thing to do from a group point of view. But I don’t think there is that much arbitrage left in this industry. Nobody can sell a sub-par product to a customer beyond a certain point. So while a certain amount of your sales do come from internal products, there is a reasonable amount of external AMCs that one builds their business on. 

Nimesh Shah: A bank has to ensure that the right product reaches the right customer. To that extent, the lesser number of products in the retail market would be more rewarding. Banks should go for more defensive products so that they sell limited number of negative experiences. What is a product that you want to give to a new person coming in when the Sensex is at 32,000 points? I think banks have got a huge responsibility in that. There were a lot of negative experiences with mutual funds in 2009-10 because investors entered a bubble market. This should not repeat. For the next two-three years, the biggest challenge for a bank would be to ensure that it does not sell negative experiences in mutual funds for its customers. It’s a very good product, but if sold in a bubble kind of market, things can go wrong. 

Nilesh Shah: In the Hindu Varna system, there are Brahmins, Kshatriyas, Vaishyas and Sudras. In the financial market also, we have a caste-based system. So an insurance agent and a mutual fund distributor get different commissions whereas a seller of the National Pension System gets almost no commission. Then, on the distribution and parentage side, we have a similar issue. Data suggests that there are banks which sell 97 per cent of their mutual fund for their sponsor’s entity. Then, there are banks which sell 15 per cent or 20 per cent of their sponsor’s entity. 

Even within the industry, we have a caste system. So if you came early and launched a balanced fund, you were given permission to launch multiple balanced funds. One could be a large-cap and one could be a mid-cap in which you could invest 90-95 per cent in equities. And, if you came late, you are told that only 50-50 (debt:equity) is balanced fund. 

It is important to create a level-playing field. Let people succeed based on merit, and not due to privileges given to them. And if reservation has to be given at all, it should be to the Sudras and not to the Brahmins.