Our focus will now be on equity and hybrid space: Edelweiss MF MD & CEO

Radhika Gupta believes the tax change also had some positive implications for the fund house

The change in tax structure for debt funds in April was expected to be a big blow to Edelweiss Asset Management Company, considering its strong presence in the debt space, especially in passives as at the end of the 2022-23 financial year (FY23), passive debt schemes accounted for 69 per cent of its total assets under management (AUM), driven largely by Bharat Bond funds. However, Radhika Gupta, managing director (MD) and chief executive officer (CEO), Edelweiss Mutual Fund (MF) believes that the tax change also had some positive implications for the fund house. In an interview with Abhishek Kumar in Mumbai, she says that the AMC’s work in equity and hybrid space is now getting the desired attention. Edited excerpts:

How has the change in debt fund taxation affected your business plans, considering that passive debt was your primary offering?
 

Passive debt was never our primary offering, it was only perceived to be so. We always wanted to be a full-scale asset manager with capabilities across the board. This is the reason why we built a dedicated team for hybrid funds and were the first AMC to do so. In 2019, a new opportunity arrived for us in the form of Bharat Bond. The fund scaled faster than our own aspirations with the AUM scaling up to around Rs 60,000 crore in a matter of few years (by July 31, 2023). Due to the immense popularity of the fund, we started getting known as a passive debt AMC, overshadowing our performances in other categories. In some ways, the change in taxation has been a good thing for us. People are now noticing our performances in other equity and hybrid schemes as well.

How has the tax change affected flows into debt schemes?
 

It's too early to tell. In March, a lot of inflows came into passive debt schemes. As a result, some investors may have over-allocated towards debt. We will get a clear picture after a few more months' data comes in. What's evident is that the traction will go down but it's not like they will lose relevance. Debt MFs still hold advantage over other fixed income offerings, from longer investment tenures to deferment of taxation, to high liquidity.

Do you see a possibility of higher credit risk in MF portfolios to minimise the tax impact?
 

We are not in favour of taking credit risk in MFs. Also, the way the regulation and debt fund structure has changed over the years, there’s little scope to do that. There are a few issues. One, these papers are generally illiquid and hence unfit for MFs, considering we have to pay investors at a one-day notice. Second, credit is not meant for retail investors as they do not understand the risks well. Most investors still come into debt with a bank fixed deposit-like mindset. The alternative fund space is better suited for credit play.

What’s next for Edelweiss MF — your medium-to-long term plans?
 

Our last six years were devoted to getting size, scale and relevance and we are now moving to the next phase — from growth to investment. We will be putting in capital to add depth to our offerings, adding more pools of revenue and increasing profitability. The focus will be on equity and hybrid space, while maintaining our stronghold in debt. We have consistently grown our investment team over the years. Now, for the first time after 5 years, we've taken significant measures to enhance the size of our sales team and expand our location presence. We are optimistic of growth, particularly in tier-II and tier-III markets, where our increased physical presence is set to make a significant impact.

The pace of new investor addition has slowed down this year compared to 2022. What could be the reason?

In absolute terms, the additions are quite good. It looks less exciting compared to previous years as the post-Covid-19 period was marked by a high pace of expansion in the investor base. There were several factors working in favour of it -- from people working from home to a rise in ease of investment owing to digitisation. Apart from these, the one-year returns of MF schemes also play a key role in attracting new investors. The one-year returns were better in the first half of 2022 than in 2023.
 

Why has Edelweiss made sharp cuts in expense ratios of passive equity funds?

The plan is to have scale in the business. We have a good bouquet of offerings in the equity passive side, some of them being unique to the market. We are now offering the schemes at a more efficient cost.