'The industry is still at the nascent stage, despite managing around Rs 33 trillion of AUM'

Revision of expense slabs by the regulator, the push towards passives, and the anticipated entry of several new AMCs translate into a greater focus on cost. Do you believe there is potential to drive the costs (expense ratios) down substantially from the current levels while still running the business profitably?

Allow me to address these points one by one. With regard to bringing down the expense slab, yes there has been a concerted effort from SEBI to bring the cost down. However, in my view, this is not going to have any substantial impact on the profitability due to the sheer potential that the industry holds. The mutual fund industry is still at the nascent stage, despite managing around Rs 33 trillion of AUM (source: AMFI). I believe we have only scratched the surface yet. The world average of mutual fund AUM to GDP is 63 per cent, whereas in India, that is only 12 per cent. The US is the highest at 120 per cent. Also, in terms of equity AUM as a per cent of GDP, the world average is 36 per cent, India is at mere 5 per cent (source: IMF, CRISIL Research). Additionally, India's population as compared to the world is a younger lot. The fact that India is placed better than other emerging markets on the economic-growth front, we may also see more FII money flowing into our economy. These factors give me confidence that we have a huge ground to capture, especially the non-metros and tier 3/4/5 cities.

That brings me to your second point. In my view, the next leg of growth will come from the non-metros tier 2/3/4 cities, given the lower penetration. Additionally, the financial literacy of non-metro investors is relatively lower than that of investors in metros. However, due to lack of investment options (thanks to falling FD rates and subdued real-estate prices), investors will inevitably find their way to equity markets. Plain-vanilla products like passive funds might be a suitable entry-level product for such investors due to its simplicity and lower cost. I foresee the role of mutual fund distributors (MFDs) would be more crucial than ever, especially in the tier 2/3/4 cities. Given investors' restricted knowledge of the equity market and limited investment options available to them, mutual fund distributors and financial advisors will play a big role in addressing the investment needs of investors, thereby contributing to the financial inclusion of the society. Share of passive funds to overall mutual fund AUM has risen from less than 1 per cent in 2010 to over 10 per cent in 2021 (source: AMFI). This is only going to increase going forward. In the US, the share of passive funds is around 50 per cent. This is precisely why you may see new players, including fintech companies, setting up AMCs to capture this untapped market. However, I believe that the mutual fund market is so big that there is space for everybody to grow.

The precipitous fall in interest rates has spelt big trouble for regular income seekers. Do you think the fund industry can better serve this investor segment and in a cost-effective manner? What's your big idea to solve the investors' income problem?

We have small-saving schemes which are primarily targeted to senior citizens and the rural populations of India. Schemes like PPF, NSC, Kisan Vikas Patra, Sukanya Samriddhi Scheme,​​​​ savings deposit and other small-saving schemes' interest rates were kept unchanged till September 30, 2021. These range from 5.5 per cent to 7.4 per cent for a period of five years (source: Indiapost.gov.in). However, the government has been mindful of the high price at which these schemes cost them. Hence, the government is closely watching the rates. But these schemes come with their own limitations. Senior Citizens Savings Scheme, for example, allows investments up to 15 lakh. Sukanya Samridddhi has a cap of 1.5 lakh per year and it is allowed for a maximum of two girls of a couple. This also comes with a lock in period till the girl child attains 18 years in age. With the rates going down, the reinvestment risk here is very high. While this may still continue to be the investment universe for the lower middle class, for the mid and upper middle class, the surplus left post investing in government schemes will find its way into mutual funds. Here once again, the role of MFDs would be instrumental.

India has already set itself on the path of transforming itself into a developed economy. One of the key characteristics of a developed economy is that it has a low inflation rate and therefore, the interest rates are also relatively lower. The inflation rate in the US never crossed 4 per cent since 1990 and (source: CEIC) as a result, interest rates since then have hovered around 3 per cent before falling to near-zero level presently. In my view, as India progresses to become a developed economy, we should see our inflation coming down and therefore, our interest rates to fall over a longer period of time (eight to 12 years). A simple analogy could be drawn here is that our interest rates in the 1990s were upwards of 15 per cent and during the same period, FD rates were around 18-20 per cent (source: RBI). This has come down as our economy kept on getting bigger and bigger. Today a five-year FD offers less than 7 per cent return (source: RBI). Thus, in my view, FD rates are only going to see a downward trend in the long run.

All this indicates that domestic investors will most probably shift to the equity market in the quest for alpha. And passive funds could be the preferred fund for such investors, as they are the best-suited product for newcomers. We have already started seeing the shift at least in the corporate segment where the Government of India has directed public-sector enterprise and PF trusts like EPFO to shift to passive funds to ensure reasonable returns to investors in order to compensate for falling FD rates. Slowly, we may see even the retail segment getting active in this space.

Rapid-fire questions:

• Investment guru/manager you admire the most: Warren Buffett for his dedication, discipline and patience.
• Business leader you'd like to emulate: Padma Vibhushan Shri Ratan Tata for his passion to serve his employees and customers and compassion towards the society.
• The most rewarding financial investment you've ever made: Investment in LICMF schemes five years back, which yielded higher- than-expected return over inflation.
• Money mantra you swear by: The longer you stay invested in a mutual fund, the larger is your wealth creation.
• If not a money manager, you'd be: A teacher with passion to improve finance literacy among women population and rural India.