Meet the Manager. ‘I see the MF industry getting bigger and better’

Until now, the industry has been focusing more on the top line. Many of the deals in the mutual fund industry used to happen only on the basis of the multiple of AUMs (assets under management). So, many AMCs used to keep building up their AUMs even if they were bleeding at the bottomline level.

After our listing and the listing of HDFC AMC (that has announced its intent to list), one of the changes will be that investors will start focusing on profitability. There are mutual funds that may be relatively large in terms of AUM size but weak in terms of profitability. If investors believe that the AMC’s profitability is not going to be good, there could be exits or consolidation. So, there could be acceleration of consolidation because the focus will now move away from top line to the bottom line.

The mutual fund industry has been on a roll. Nobody would have imagined five years back that the industry would be three times what it was. There have been a few catalysts over the last few years.

One, the various initiatives taken by the government such as Jan Dhan, demonetisation and digital drive. Next, other physical assets such as real estate and gold not being so attractive. I see the mutual fund industry getting bigger and better. That said, there is still a long way to go.

Of the ₹21 lakh AUM, about ₹10 lakh is institutional/corporate money, ₹6 lakh is HNI money and only about ₹5 lakh is retail money. Taking into account the various financial inclusion and digital initiatives, I think we have just scratched the surface.

One good thing is that the trend of mutual fund investing typically being a big city phenomenon is changing. As on September 30, we had 171 branches and we were in 30 locations where no other mutual fund was there. We are increasing the branch count to 500 branches, of which 100 will be opened in this financial year itself.

This is based on the belief that a lot of the growth will come from small cities and towns. We are already one of the largest players in the B15 (beyond Top 15) locations. We are looking at B100 now.

While there has been a lot of discussion about the consumption theme in the country being driven from smaller cities and towns, I don’t see any difference between the consumption of FMCG and investments/financial savings. We see mutual funds becoming a part of the monthly wallet for every investor.

With technology, the higher cost of distribution in smaller cities and towns is being addressed. About 20 per cent of our new incremental business is coming through our digital properties.

I think the biggest trigger for the inflows is the various government initiatives such as Jan Dhan and demonetisation.

Yes, better returns always leads to further investments. That said, I do not think that investors are only coming after seeing the returns of one or two years. Of the ₹15,000 to ₹20,000 crore of money that is coming in monthly, at least ₹6,000 to ₹7,000 crore of equity money is coming through monthly SIPs (systematic investment plans).

These SIPs are not coming based on only the last one-month returns nor are they going to stop because of temporary falls in the market. Even if markets correct significantly, while existing SIPs won’t stop, new registrations can slow down. Also, retail SIPs that are typically smaller ticket are more sticky and will not stop while SIPs by high net worth individuals that are typically high value and dependent on market movements could slow.

While to an extent the high liquidity in the market is pushing up returns, it will eventually also have to be driven by corporate earnings. Liquidity cannot drive markets beyond a point and I expect corporate earnings revival to happen soon. The wait seems to be getting over now.

What do you think about SEBI’s recent move to extend incentives to B30 cities from B15 cities earlier?

We support this move by SEBI as the MF industry should now try to focus on India’s hinterland. This should be later extended to 50 cities from current 30 cities. The special incentives offered earlier for B15 cities have has been successful to help penetrate mutual funds in these cities and now it’s time to increase the penetration further. With the same intent we extended our presence to more than 100 new locations in the past six 6 months.

The Budget has introduced Long Term Capital Gains Tax (LTCG) and Dividend Distribution Tax of 10 per cent for equity oriented mutual funds. Though any tax is negative from an investor’s perspective, given the high growth potential of the Indian economy the modest tax should not be a big concern to investors. The average returns generated by equities, and equity mutual funds, in the past, have been in higher double digits.

Investors would not, and should not, mind paying a small part of their profits as taxes. Therefore, I don’t see any major impact of this announcement, per se, on the MF industry.

While the strong bull run for over a year before the Budget was very rewarding, in some ways it was abnormal as there was no pullback whatsoever and volatility reached low levels. Historically, we have seen that market corrections are normal and happen all the time during any uptrend. We are witnessing one such correction which should be considered a bull market correction driven by price, positioning and some valuations excessiveness. A couple of things coincided which led to a rather sharp pull-back. In the Budget, LTCG got introduced on equities and simultaneously global markets sold off on the worries of rise in inflation and therefore rising yields.

This pull-back doesn’t alter the market trend which is up. Macro data both domestically as well as globally is very robust. Corporate earnings are on their way to their strongest growth in over seven years in FY19. Also, after the fall the valuations for many quality companies have become more reasonable. Overall, while a repeat of 2017 is difficult, the outlook on equities remains quite constructive. We are bullish on consumer discretionary, early capex plays and banks as we see recovery in banks’ credit growth. Investors should look to increase their equities allocation in this correction phase, preferably though a diversified multi-cap fund.

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