Investors need suitable products, not complexity, say mutual fund CEOs

India’s mutual fund industry has room to expand as systematic investment plans (SIPs) bring more households into financial markets, but high smallcap valuations and the need for stronger risk management remain key concerns, industry leaders said at the Business Standard BFSI Insight Summit in Mumbai.

Speaking at the session titled 'The Future of Asset Management', moderated by Business Standard’s Abhishek Kumar, the leaders of four asset management companies (AMCs) discussed the industry's growth prospects, product innovation, the emergence of specialised investment funds (SIFs) and the role of artificial intelligence (AI).

DSP Mutual Fund MD & CEO Kalpen Parekh said investors with a long-term horizon should not base decisions solely on current valuations, though risks in the smallcap and midcap segments cannot be ignored.

“If you have a 10-year or 20-year view, today's valuations don't matter,” Parekh said, while noting that smallcap and midcap stocks had run ahead of their fair values in recent years.

He said fund houses had previously restricted or slowed lump-sum investments in smallcap schemes when valuations rose, with some encouraging investors to use SIPs instead. Those contributions were now part of the monthly inflows into smallcap and midcap funds, he said.

However, investors needed to distinguish between the performance of an index and that of individual stocks, Parekh said. While smallcap and midcap fund net asset values had fallen 4-5 per cent from their peaks, some individual smallcap and microcap portfolios had declined 30-40 per cent, he said.

For investors uncomfortable with volatility, hybrid funds, multi-asset funds and flexicap schemes could be more suitable starting points, Parekh said. Those choosing smallcap funds should look for experienced fund managers and robust risk management rather than chase past returns.

ICICI Prudential AMC MD & CEO Nimesh Shah said fund houses needed to consider how products would be understood by investors beyond large cities.

“Mutual fund has become a mass product,” Shah said, arguing that a product designed in Mumbai's financial district also had to work for a retired schoolteacher in Guwahati, Ludhiana or other smaller cities.

He favoured broad-based schemes such as flexicap, largecap and midcap funds, which allow fund managers to adjust allocations according to market valuations, rather than investors making concentrated bets on individual market cap segments.

Shah also pointed to hybrid funds as a way for investors to access both equity and debt. These schemes can adjust their equity exposure as market conditions change, he said, adding that taxation had influenced how investors approached debt investments.

The industry has continued to innovate, with SIPs, gold exchange-traded funds (ETFs), target-maturity funds and hybrid schemes addressing different investor needs, said Edelweiss Mutual Fund MD & CEO Radhika Gupta.

“Innovation doesn't mean complexity. Innovation means making things accessible for the consumer,” Gupta said.

She described SIPs as one of the industry's most successful innovations because they offer salaried investors a structured way to save and invest. Gold ETFs, meanwhile, allow investors to gain exposure to gold through financial instruments rather than buying the physical asset, she said.

Gupta said the smallcap market also needed to be viewed in the context of India's changing equity market structure. As more companies list and the market broadens, some sectors likely to drive growth over the next decade could be represented in the small-cap universe, she added.

“You can't ignore small-cap investing,” she said, while stressing that valuations and the quality of individual businesses remained important.

Gupta also expects hybrid funds and SIFs to play a greater role in investors' portfolios, particularly for those seeking income and lower volatility over an 18-24 month horizon. The appropriate product, she said, should depend on the investor's needs rather than the popularity of a particular category.

Sundeep Sikka, MD and CEO of Nippon India Mutual Fund and chairman of the Association of Mutual Funds in India (Amfi), said the industry's long-term ambition should be to bring mutual fund investing to every Indian household.

He said the industry's focus needed to shift from assets under management (AUM) to the number of people investing. He emphasised that while AMCs and Amfi were working to expand awareness, individual fund houses also needed to reach investors in smaller cities and towns.

“We have to change the narrative to the number of investors,” Sikka said, adding that wider participation would help more households benefit from the country's economic growth.

Sikka compared the role of SIPs in household saving with that of equated monthly instalments (EMIs) in India's consumption story. Monthly SIP contributions, he said, had risen from less than ₹3,000 crore a decade ago to around ₹30,000-32,000 crore.

Sikka added that AI would help fund managers research companies and process information, particularly as more businesses enter the listed market. However, he does not expect AI to replace human judgement. “Companies which use AI are better off, but companies which use AI and human capital are even better off,” he said.

Shah said SIFs could become a significant category if fund managers used derivatives responsibly and maintained strong risk-management practices. Greater flexibility, he said, also brought greater responsibility to protect investors.

Parekh said DSP was taking a cautious approach to launching SIF products, given the complexity of some strategies and the limited pool of experienced managers in India. The fund house was building a team with expertise in long-short strategies, he said, adding that it did not want to learn at the expense of investors.

Sikka said Nippon India Mutual Fund planned to launch its SIF offering, under the brand name Endurance, with two products expected in the following three months.

The broader challenge, Gupta said, was to match products to investor needs. Rather than asking whether an investor should buy an SIF, she said, fund houses should first understand the problem the investor wanted to solve.