Big investors driving increased flow in mid, small-cap schemes: Axis MF CEO

The recent spurt in prices of mid- and small-cap stocks has come amid increased flows from high-networth investors (HNIs) in the last four-five days in the mid- and small-cap schemes, says CHANDRESH NIGAM, managing director and chief executive officer of Axis Mutual Fund. In an interview with Samie Modak and Jash Kriplani, Nigam shares his views on slowdown in equity flows, loan against shares, and ‘standstill’ agreements. Edited excerpts:
 
What has led to the sharp slowdown in flows into equity mutual funds (MFs)?
 
Poor short-term performance, increase in volatility, and election uncertainty have weighed on equity flows. Also, inflows into balanced schemes have been hit due to the imposition of dividend tax. The product is not very appealing for investors looking for regular income. All put together, there has been a 30 per cent drop in gross monthly flows. In January, net inflows dropped to about Rs 8,000 crore, from a peak of over Rs 20,000 crore. February numbers are not out, but it could be less than that.

 

Is the trend worrying?
 
It is not necessarily a worry. MF flows are cyclical. We would be concerned if the economy is projected to slow down, but that’s not the case. Market returns are also not linear. In some years, you may get 40 per cent return; there are times when you get negative returns. At some point, six-month and one-year returns will begin to look good. Many investors are sitting on cash. As soon as there is slight improvement in the market, inflows should see an improvement.
 
Is the recent spurt in mid- and small-cap stocks a reflection of increased flows in these schemes?

 
We have seen increased flows from HNIs in the mid- and small-cap schemes in the last four-five days. Sophisticated investors are taking tactical calls on the mid- and small-cap categories. There has been sustained correction in some of these categories. Some wealthy investors see this as a good time to deploy their funds. There has not been a sharp rise in the number of transactions, but there is an uptick in terms of the amount coming through into these schemes. We will have to see whether these chunky flows would continue and also whether market conditions remain conducive.
 

When do you think the dust will settle on the debt side?
 
When you chase high yields, investors have to understand there could be stress. Loan against shares is one such strategy. Recent events have brought to fore some of the risks. In most cases, the underlying businesses have come under stress. On a fundamental basis, if a sector is not doing well, the stress will show up somewhere. Overall, I think credit portfolios have held on fairly well. The decibel levels had reached the peak, but there have not been any defaults as such. Yes, there have been rating downgrades, liquidity issues, but no large defaults. The market should settle over the next three-six months. Right now, investors are worried about defaults. But if the scare goes away, we will see flows return.

 
What are your views on ‘standstill agreements’?
 
We are not in favour of restructuring of agreements. We understand that in some cases it might be required to protect investors’ interest.
 
How have regulatory changes such as re-categorisation and cut in total expense ratio (TER) affected the industry?
 
Re-categorisation has played out well. The TER cut has put pressure on the industry and the distribution community will largely have to bear the brunt of it. But all these changes are good for the investors. From an investor’s perspective, MFs have become attractive, both in terms of transparency and cost.

 
Will distributors stop ‘pushing’ MF products due to lower commission?
 
MFs have become fairly mainstream. Serious players are not saying we are shutting down the business as the commissions have come down. If we see a lot of people exiting the business due to remunerative reasons, we might have a problem. But I don’t think that’s going to happen. The interest in the markets will remain, which will draw investors towards MFs.
 
Axis MF has shown good growth in AUM, but profitability has seen some pressure of late?
 
Our business has been growing fairly well. Our market share is improving as our growth has been higher than the industry rate. We have aspirations to become a lot bigger. To achieve this, we have to spend more money on business development. That’s the reason for the drop in profitability in 2017-18. 

 
MF is a scale business. We all know margins are under pressure for all the players. Yields are coming down due to the cut in TER. Some part of it will have to absorbed by asset management companies. The key for success is to build scale and sustainability.
 
Would you look at inorganic opportunities for growth?
 
Inorganic route is on the table, but there is nothing on the cards immediately. Earlier, it was the case that you could get some products. But after re-categorisation, that is not the case. The inorganic route would be tapped for some strategic opportunity, whether it is for distribution or anything else. We had forayed into alternates two years back. We will have to see if there are any opportunities in that space.

 
 
Could we see some new product launches from Axis MF?
 
We feel some of the Indian investors are ready to diversify to international markets. There are many growth opportunities available globally, which are also suitable to our growth-focused investment philosophy. In some of the international markets, innovation is happening at a fast pace. So, we expect to launch a number of products that will invest internationally.