Passive funds can work if they simplify investing: Motilal Oswal AMC CEO

Once we see some recovery in real estate, this money will get released and move towards capital market products like mutual funds, says Aashish Somaiyaa

Actively managed equity schemes have continued to underperform passive funds for the second straight year. In an interaction with Jash Kriplani, Aashish Somaiyaa, MD and CEO of Motilal Oswal AMC, which recently launched a clutch of passive funds, shares why he sees huge scope for such products. Edited excerpts:

There has been some criticism of certain equity investments made by the fund house, even as the recent scheme performance has been better?

Markets rotate in and out of favour with certain investing styles, sectors, and stocks from time to time. Every fund and fund manager goes through cycles. But the investment process should not be judged by a one-off investment decision gone wrong; like we had with investment in Manpasand Beverages last year. Overall, our schemes have delivered a robust performance since the bottom in October 2018. The equity market was plagued with multiple governance problems and large companies disappointed investors. Our process ensured that we stayed out of each of these large-scale debacles. Some of these were large-cap frontline companies, which have destroyed shareholder value. Also, a few of the initial public offerings institutional investors subscribed to have bombed. Our investment process filtered these out. We have managed to stick with our high-conviction ideas through the cyclical downturns.  

What is rationale behind launching a clutch of index funds such as the Nifty 500 Index fund and the Nifty Midcap 150 Index fund?

The idea behind launching index funds representing broader markets is to make it easier for new investors to take investment decisions. The least a new investor — who doesn't know what to buy — can do is to buy the market. For instance, a Nifty 500 fund would comprise companies that account for approximately 96 per cent of the market cap. Not all investors would know which is a suitable fund for them, so they can consider these funds representing large segments of markets. We feel there is huge scope for passive funds if the product is able to simplify investment decisions. Today, with the influx of direct platforms, many new investors are looking for funds without any intermediary. So, such funds can help these investors. We have also launched the Nifty Bank Index Fund and the Nifty Smallcap 250 Index Fund.

How should investors position themselves for next year, with the broader markets yet to pick up?

We are seeing loose monetary policy as well as fiscal policy. Growth is also on top of the government’s priority list. So, we will eventually see the economy bottoming out. While the quality of revival is still not clear, we expect to see it in the next couple of quarters. One can expect to see a run-up in stock prices as the markets tend to be forward-looking. It is prudent to invest when the recent past has been not so great. Both mid- and small-cap indices have probably for the first time seen back-to-back years of negative returns.

What is your outlook on deploying flows from HNIs (high net-worth individuals) in mutual funds?

A lot of HNI money is tied up in real-estate inventories. Once we see some recovery in real estate, this money will get released and move towards capital market products like mutual funds. Investors are looking for more liquid investments, which is not the case with real estate at present. The sector has been in this cycle for the last five years.

Are taxation norms hurdles?

An issue is taxing dividends. Today, dividends are taxed at multiple levels. First, companies pay tax on the profits they make, and then they also have to pay tax on sharing the dividends from these profits. The shareholder also needs to pay tax if his dividend income is over Rs 10 lakh. A shareholder is an owner of the company, which has paid tax on its profits. So, what is the need for taxing it at two more levels? Addressing the taxation issue can unlock a significant segment of investor flows, especially from HNIs.

How do you see commission cuts impacting distribution?

One can keep arguing about virtues of MF products for investors, but there is no point if the product itself doesn’t reach the end-investor. Asset management companies can absorb certain costs more effectively than distributors, but latter would find it more challenging.

Distributors are now finding the business less viable. This can be seen from slowdown in registration of new independent financial advisors.