We don't support the no-trail model: C V R Rajendran

Interview with CEO, Amfi

As the size of the domestic mutual fund sector is growing, the Association of Mutual Funds in India (Amfi) is gaining prominence. C V R Rajendran, former chairman and managing director of Andhra Bank and the new chief of Amfi, talks to Chandan Kishore Kant about his priorities and the road ahead for the sector. Edited excerpts:

As the chief of Amfi, what will be your top priorities?

Amfi has to persuade investors to increase financial savings. Most savings are going into real estate and gold. The mutual fund sector is spending about Rs 250 crore a year on financial literacy. Despite a population of 1.3 billion in India, the number of mutual fund investors is only 10 million. Slowly, as other asset classes are becoming less attractive, we need to take this opportunity to sell mutual funds more aggressively and demystify certain perceptions about stock markets.

The mutual fund sector has been hit by a recent corporate default. What is your take on that?

Whenever you are taking a credit risk, defaults are a possibility. Our investment policies mandate us to invest only in highly-rated papers. Asset management companies (AMCs) are only enablers for investment. It is stated in the offer document that there is a credit risk; that’s why you get a higher return. If there is a default, the losses have to be borne by investors, there is no doubt about it. The problem is our markets are not liquid. In developed markets, there is an exit route --- one can get rid of the securities if something wrong happens tomorrow. In India, even if there are no downgrades, an exit route is difficult, as bond markets aren’t liquid.

Is it possible to have a safeguard mechanism to avoid similar defaults?

There must be a fund that invests only in junk bonds. Globally, junk bonds are a very big business and it has given good returns. We have grown to a size in which we should have junk bond funds, too. Small investors can be kept out of these funds. Maybe, we could have a minimum investment cap of Rs 10 lakh. Today, non-performing assets in the banking system are bought by asset reconstruction companies at a discount. If mutual funds with good credit departments have the capacity to create such a fund, they could buy into these papers. In time, there will certainly be a lot of interest in such funds.

The recommendations by the Sumit Bose committee on mis-selling of financial products (including MFs) haven’t been received well by your members.

As a sector, we are not comfortable with ‘no-trail’ recommendations. Mutual fund investments are to be monitored and advisors need to be paid for monitoring the investments. Trail commission can’t be completely dispensed with.

But the recommendations were in line with the Securities and Exchange Board of India (Sebi)’s thought process.

We understand Sebi wants to reduce load over a period. I agree when the volume increases and literacy rises, the commission could fall. But bringing a new investor into our fold takes a lot of effort. Naturally, intermediaries need to be compensated for that. Investors have to pay in the longer run. But today, the market is not mature enough to absorb this. But if we take the Sumit Bose committee report as a road map, many of these things are possible in the longer term. But there can’t be a shorter timeline to implement these.

How would you handle the small-vs-big fight in the sector? Can you escape favouritism towards the top 10?

There is no need for a fight between big and small players. Both have their own strengths. There is no need to fight for market share. Instead, we could expand the market, following the ‘blue ocean strategy’, while creating uncontested market space and making competition irrelevant. There is potential for the market to grow at least five times. We need to work in that direction. But as an association, I have to protect everyone’s interests. One should not be growing at the cost of another; that will not be allowed. The big can’t survive at the cost of the small. It is an unnecessary fear on the part of the companies that think they aren’t being treated fairly.

Is there scope for new fund houses or could we see some more exits?

Asset management is a business that doesn’t require much capital. The net worth required is only Rs 50 crore and there is no capital adequacy requirement for AMCs, as banks have. Naturally, there is a lot of room for new players in the niche markets. However, what is worrying is many existing AMCs are yet to break-even. They can’t afford to burn cash continuously. They have to turn profitable.