‘India has one of the simplest cost structures for MFs’

Aarati Krishnan BL Research Bureau | Updated on May 03, 2018 Published on May 03, 2018

Sanjay Sachdev is the Chairman of ZyFin Holdings, an advisory firm which offers India-focussed ETFs in global markets and provides macro-economic research. Sachdev is a financial services veteran with over two decades of experience in markets and money management. His earlier stints include — Managing Director of Principal PNB Mutual Fund, MD of Shinsei Bank in India and President & CEO of Tata Mutual Fund. Sachdev was global Chairperson of the Financial Planning Standards Board (FPSB) — USA. He is founding chairman of FPSB India and has been a member of the SEBI Advisory Board. BusinessLine caught up with him over email to get his views on what’s brewing in the markets, flows and MF regulation. Excerpts:

Are rising bond yields in the US impacting FPI equity and debt flows into India?

The increase in global interest rates by the Fed has been measured and done in a manner which is non-disruptive. What markets and institutions don’t like is uncertainty. The current glide path of interest rates is well-defined to reduce this risk. I don’t think that increasing interest rates will be a key factor that a longer-term investor should consider for strategic allocations. But tactical allocations may be, and have already been re-aligned. Global investors continue to be positive on India with mild caution and their allocations to India, in my opinion, are bound to increase in the coming years.

Why have ETFs not taken off in India and do you see potential?

Global ETFs, either as index trackers or smart-beta funds, have grown on a sustained basis in the last decade. With the EPFO now participating in ETFs in a meaningful manner and the fund manager alpha reducing, it is only a matter of time before ETFs in India see a catch-up. In India, the mutual fund industry continues to be in a nascent stage. With the recent MF growth, which is a structural change in the savings habit of India, the mutual fund industry will grow by 7 to 10 times in the next decade, implying a growth of 20 to 25 per cent CAGR. Given this momentum, ETFs and passive plays will be a big growth story that will drive costs lower for the industry.

Why does India have such a limited suite of indices on which ETFs can be constructed?

Indices, especially those which can be replicated by large flows of institutional money, require two factors to be in place. First is market depth and low impact costs. Second, we need wide investor participation across stocks. So, the challenge really is a large enough suite of replicable indices and increased participation by market players in these. But we believe that this trend has already started in India though it is still in its infancy. The immediate next five years will see this trend gaining steam.

Can full-market ETFs like a BSE 500 ETF work in India?

Not yet. Liquidity in India is still limited to the top 150 traded stocks and beyond that, the liquidity diminishes significantly. Till liquidity in the tail increases to reasonable levels -- and this will happen as the market matures — it may not be possible to effectively run a large ETF based on the BSE 500 or any other index which goes beyond the top 200 stocks. The way forward is for the regulator to ensure that fly-by-night operators cannot access the capital markets or manipulate the volumes in the lower end of the tail, in terms of traded stocks. This can be done by increasing surveillance and automated detection of trading patterns, circular trading and acting swiftly to stop these practices. I understand that SEBI has put algorithms in place to track such activitiesy and stop it right at inception, which is a proactive approach.

Do many investors go to financial planners and advisers in countries such as the US? Or do they prefer to go direct?

In the developed markets, it has been demonstrated that financial planners add significant value to investors in terms of identifying their goals, managing investor behaviour and advisor alpha. Almost 90 to 95 per cent of investments in developed countries are made with the help of financial planners. Only very sophisticated investors do direct investments. The direct investment option route should be limited only to institutional investors who have an in-house treasury function, rather than nudging retail investors also to go direct. This will be very harmful to the asset management industry in India, especially in times of heightened volatility when investors can take irrational decisions without proper financial advice. The need of the hour is that the asset management industry and the regulator come together and focus on how to increase financial planning expertise in India and nudge investors towards the right investment advice, rather than continue the current environment of self-medication.

There has lately been a debate about MF expense ratios in India being much higher than in the rest of the world. What are your views?

Cost structures have been reducing globally in the asset management industry, but this has to be seen in terms of size and economies of scale. With assets increasing, reduction of costs is a natural corollary. The core point is that this trend is competition- and market-led, rather than regulation-driven. India has one of the most simple cost structures in the mutual fund industry which encompasses all costs in a single TER (Total Expense Ratio). This provides investors with a very good understanding of their net returns. This is critical from an investor standpoint and should not be abandoned. In the US, cost structures are disaggregated leading to an artificial and incorrect comparison by some MF agencies with respect to the cost structures prevalent in India. Ultimately this leads to incorrect conclusions that Indian cost structures are higher. One also has to factor in the scale and size of the industry and penetration levels. The focus should be more on net value creation, innovation and access rather than purely cost from an investor standpoint.

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