Kickstarting Growth

It has been a tumultuous couple of years for India's mutual fund business. A host of regulatory changes, specially the abolition of entry loads has meant a rapid reinvention of the business. The Value Research CEO Roundtable was primarily focused on whether the investor is displaying a meaningful shift to investing over the long-term and what kind of changes are needed to kickstart growth. The participants were eight CEOs from some of the biggest AMCs in India

The first and foremost thought which comes to my mind is whether or not investors are short term in their approach. And if so, what have you done about it?
Sandesh Kirkire:You are right because for every Rs 100 that trades in the secondary market, perhaps `1 or 2 is for delivery. The secondary market is made up of flippers in the market. Long-term investing in the Indian equity market is only through the institutions like mutual funds or insurance.
As an industry, the focus on building on the long-term systematic investment plan is the only way out and for an investor, long term and disciplined investing is the only way to creating wealth. Simultaneously, we can create the long term investors that we need because from a business perspective.

Deepak Chatterjee:Investors typically had a very short term view in mind but I think change is being noticed and retail investors typically are being very careful and smart. It's a guess no doubt, but we could be pleasantly surprised by the way retail is going to come back to equity, largely through mutual funds. And the comeback is definitely going to be for a longer time horizon--the industry average stickiness of equity mutual fund assets is in the region of two years.

Milind Barve:A silent movement has been how the industry has built the SIP business. I don't have accurate data because it's not published, but I think close to 70 lakh transactions are done every month, value wise - `1,700 crore probably. This is almost like a revolution. Every AMC, whatever be the size, scale or product mix, has made a religion out of selling SIPs. SIPs are good for customers and attract and retain people who have a genuine long term perspective. The garnering of SIPs, the numbers we see today, we have not been anywhere near these numbers before the last three years.
My concern actually has more to do with how good the underlying market will be. Finally people come to equity as an asset class and within that choose a mutual fund and within that choose a fund house and then a product. This happens if they have the fundamental faith that the underlying equity market gives good returns. I would say that today our real challenge is to take this product across to show strong performance over the medium to long term. Nothing is more convincing than performance.

Talking about how SIP will be a big driver, why didn't it happen till 2007? Why only now?

Sundeep Sikka:The industry has been around for 15 years but majority of the investors have entered between 2005 and 2007. Then we had various global and domestic crises. The industry is evolving, investors are evolving and how we run our companies is evolving. When investors started coming in 2003 and 2004 and were making enough money, they could have easily move out after taking gains. The testing period was between 2008 and 2011 - this is the time people began to realize what discipline is and how patience rewards.

Harshendu Bindal:I think the broader question is whether the issues of the mutual fund industry are any different than the broader capital markets? Are people coming into direct equities but not choosing mutual funds? That could be the debate. Indians generally are less aware of capital markets, they don't tend to partake in equity investments and as a subset of that...

There are different ways in which people take equity exposure - directly, through a PMS, becoming a day trader or via mutual funds. Mutual funds present a very compelling case. From that stand point, it is a great story which has been so undersold.

Saurabh Nanavati:The fundamental issue is how people perceive mutual funds. It is a pass through vehicle, it gives diversification and must be the first entry point for an investor in the market. It's not a stock which you trade if it goes up. A big issue in the industry is that people are treating a fund as an individual stock. When they make a particular return they just exit, even if it is within two years. Fundamentally, if you have got into a good fund, just stay invested and leave it to fund manager to make all those changes.
I would like to comment on how we advertise mutual funds and what we say for five seconds after the ad gets over? Mutual funds are subject to market risks, please read the offer document before investing. It's like a cigarette notice that it is injurious to health. You don't have that in any other financial product. For a lay investor, what is the perception he is carrying about this instrument. Today if you go to SEBI or the head of the BSE or even the finance minister, he will say that a mutual fund should be the first vehicle for investment into the market. So rather than say that mutual funds are subject to market risk, we should be saying something like "mutual funds are the recommended instruments for retail investors, please meet your financial adviser for advice on mutual funds".

Deepak Chatterjee:There are risks in everything. Take bank deposits. There is a risk - theoretically speaking. But is there any warning? Why is one bank giving a lower interest rate than the other? The regulator could be more proactive and say make sure you are knowledgeable about your interest rates and risk and all that. That aspect is not there.

Sundeep Sikka:It's also the way you communicate. The mutual fund industry, over a 15-year period, has averaged returns of 18-19 per cent, the top schemes, 25 per cent. Have we been able to communicate to the new investors what we have been able to do? A bank says I will give you 10 or 11 per cent. A common man can understand this.
What do we say? If you had invested Rs 1 lakh in a fund which became `40 lakh, we come back and say we have given a CAGR of 23 per cent. Rs 1 lakh becoming Rs 40 lakh is very different from stating CAGR. How many people outside this room understand what CAGR is?

A Balasubramanian:The global crisis, right from Greece and Europe to Dubai, definitely makes a very strong case for the kind of transparency under which the Indian mutual fund industry operates. We are unable to indicate what kind of return we can generate, but the industry discloses everything about where the money is being invested.
It's open and out in the public for anybody to see it. Today, whether it is Greece or maybe any other banks which are currently struggling with respect to coping with the current crisis, all investors do not know how they are performing and how they are running their business. In India, banks have a different kind of regulation and different experience in bringing financial stability, but mutual funds also having shown tremendous strength, managed through the 2008 crisis and come back as a winner.
That itself proves high discipline. Even if a lousy fund is disciplined, has the right process, right portfolio construction strategy and the right mind set to look at long term investing, then no investor would have lost money actually. And that's a recognition that has to be given for the industry.

Milind Barve:There is a lot of genuine effort going into creating the right model for our businesses and for investors to come in. I think all of us are way ahead of realising that retail is where we can create sustainable models for ourselves. By and large, as an industry, we are pretty much on the same page as to what we should be doing. One of the things we have not achieved as much as we should have is talking to the investor. Who's talking to the investor? We talk through our sales team, but our sales team doesn't meet the investors either. The largest carrier of our message is the distributor, and all the right modules that I can create in my room will have no impact if I am not able to transmit that into a meaningful strategy that goes to the last guy. There is a huge mass of distributors who are effective agents and the medium of communication is the distributor. The distributors are carrying our message.
Since the messenger is the distributor, he needs to be on board, he has to act genuinely as a partner in the same objective of building this industry and building long term. What's the use of me saying I want longer persistency, if the distributor's focus is different? Our ability to influence them is one of our biggest challenges.