Not the time to be complacent: Leo Puri

Interview with Managing Director, UTI Mutual Fund

After a dream run, inflows have slowed down for mutual funds since the beginning of 2016. Leo Puri, managing director, UTI Mutual Fund, tells Joydeep Ghosh & Tinesh Bhasin that the industry deserves some time to digest the regulatory changes over recent years, especially as things look uncertain over the next 12-18 months. Edited excerpts:

How will implementation of the goods and services tax (GST) impact the financial sector?

The GST rate is a sensitive issue. At present, we pay 14.5 per cent as service tax. This is expected to go up to 18 per cent, some say even 20 per cent, which I hope doesn’t happen. Even many banking transactions, services and insurance might see a rise in rates after implementation of the GST. And, all these will be passed through to the consumer.

The market has been scaling new highs but inflows have slowed. Is there investor fatigue?

Around two years back, people started investing quite aggressively. There were three reasons for that: Positive sentiment after elections, the macro sweet spot that India seemed to enter due to falling commodity prices and optimism that we are on an earnings recovery path. The sector also launched a series of products.

So, what has changed? While there is still conviction about reforms, there isn’t so much exuberance. The macros still look okay but there is global uncertainty and fear that we could be living on borrowed time as far as liquidity is concerned. And, earnings disappointed last year. People are on high alert.

Can India stay insulated from global problems?

There is no room for complacency. I am not sure that we will have unidirectional movement in interest rates. The whole market has just assumed that interest rates are going to plummet. If there is a withdrawal of liquidity and central banks feel they have run out of ammunition, it could be devastating. It might not happen in the next two to three months but if you look at next 12 months, there is plenty of scope for that kind of dislocation. We should be extremely careful.

How difficult is it for a fund manager to take a call on a sector when a company like Patanjali comes and disrupts the market?

When someone like Patanjali comes, fund managers have to analyse the impact and competition conduct, as you’re potentially seeing a pressure to change the industry structure. There are also risks of disorderly conduct for a period of time. A fund house like us, therefore, has to analyse segment by segment, product line by product line, and use a bit of game theory to gauge how people will react.

There is also a point that Patanjali is not simply cannibalising but also growing a new market. The impact is not only on Hindustan Unilever, Procter & Gamble or Colgate but also on the unorganised segment. They are also growing the pie. Overall, the impact is quite positive, as it improves earnings and productivity. Ultimately, it comes to picking the winner in the sector.

UTI has one of the largest distribution networks. How much have you attracted from smaller towns?

We still have a unique profile, both in terms of the flows we attract from smaller towns (termed B-15 in sector parlance) and from retail (small) investors. We are proud of that. In the overall basis and in comparison to larger fund houses, we stand out quite significantly.

The challenge for us is that the distribution structure of the sector has changed. There is this big shift towards banks and online platforms. There has been pressure on independent financial advisors (IFAs). As the latter is UTI’s mainstay, we have a significant stake if this community suffers. We are the only one which does not have a quasi-captive bank or brokerage. It’s very important for us to move towards open architecture. It will happen through a combination of factors. But, we will continue to support our IFAs.

Are regulations moving too fast? For example, Sebi seems in a hurry to implement the Sumit Bose committee recommendations, whereas other segments are silent about it.

I think we deserve a period of peaceful period to digest all the moves that have been made. There have been some changes that impact the manufacturer in terms of making and selling the product. Those are more sensitive issues, as they impact the core of the business. Then, there are another set of rules that are given to improve the corporate governance structure. Those don’t impact the sector so much. On the core issues, there have been rapid changes that has led to some dislocation. They were all well-intentioned but I think it is time we are given some time to digest those. The regulator also recognises this. We are entering into a period of 12-18 months of uncertainty and need to be in a strong, settled position.