Markets headed higher, accompanied with volatility: Nimesh Shah

Interview with Managing Director & Chief Executive Officer, ICICI Prudential AMC

The economy’s improved macro indicators and expectations of better earnings and return ratios will take the markets higher, says Nimesh Shah, managing director and chief executive officer, ICICI Prudential AMC. In an interview with Samie Modak, he says the move up will be volatile and, hence, investors should opt for schemes with a mix of equity and debt. Edited excerpts:

Do you see equity inflow continuing into the Indian equity space?

We are happy with the month-on-month flows on both the fund and sector level. It is imperative to understand that the current rally is liquidity-driven. The inflows into India are primarily on the basis of improvement in Indian macros, at a time when very few countries have robust macros. We have decreasing interest rates when the larger part of the world is struggling to increase these.

As a result, both the debt and equity markets are attractively positioned. Over the next two years, we believe, capacity utilisation would improve, which could aid top line growth in the near term.Earnings per share and return on equity would improve, which would likely be a trigger for a market up-move. We believe the equity markets are likely to head higher over the next two to three years, accompanied with volatility. Therefore, we suggest retail (small) investors opt for dynamic asset allocation funds, which aim to benefit from volatile markets.

Are you seeing any shift in investor preference after the sharp gains in equities?

We have seen incremental allocation in large-caps, as compared to mid- and small-caps. This shows retail investors have matured and have moved away from investing in only in-vogue products. The awareness level of customers has surely improved, thanks to the Sebi-mandated investor education programmes and efforts by the media to educate investors.

Which categories do you recommend over the next one to three years?

Dynamic asset allocation (funds that change the debt-equity mix, depending on market conditions) is a category which is expected to grow over the next three years. Increasingly, retail investors have come to believe the benefits offered by these types of funds. In the years ahead, we believe this category is likely to corner a major portion of the equity allocation by investors.

What are your expectations on growth for the sector?

With the interest rate on a downward trajectory, there are hardly any investment avenues, barring equities, which can generate inflation-beating returns. After being steeped in real estate and gold, retail investors have started to move towards financial savings. The early signs are visible in inflows on an industry and fund house level.

However, we have to understand that not everyone is equity-savvy and can invest straight into the capital market. So, most small investors are coming to equities through mutual fund and systematic investment plans, a very healthy indicator. We have seen sizable interest across our suite of products, seeking to benefit from volatility and our other core offerings, on account of our consistent track record and investment experience. Given the transparent nature of mutual fund products, robust regulations and nominal costs associated with the MF industry, we believe the sector can grow manifold.

What can aid the next phase of sectoral growth?

The phase will be led by operational efficiency, which needs to be improved at the sector. When a new customer wants to open a folio, the process should be much simpler and faster than what it is today. So, the improvement has to start at KYC (Know Your Customer check) level, currently a tedious procedure. Of 100 prospective customers who visit our website, a very small number get converted into customers. We need to create systems and processes wherein KYC is made easy.

Since we accept money mainly by cheque, if the bank has already done the KYC of such an individual, could we not rely on the bank’s KYC, as insurance companies do? If this simple change is brought about, paperwork duplication will be passé and the number of retail folios would increase significantly in the next few years.

Is the current commission structure remunerative enough?

There are roughly 10,000 active distributors in the country for such a large investor base. Hence, selling mutual funds in beyond the top 15 centres has to be made attractive, through a combination of upfront and trail fees, to attract new members and retain the current set of intermediaries. This will ensure a happy experience for all the associated parties.

Your comment on the recent credit crisis? Should one be worried?

We believe credit risks should not be a concern, as long as there is no concentration risk on a fund level. Our company’s measured exposures at both scheme and fund house level have helped us to ensure a good experience for our investors.