‘SEBI norms won’t stifle product innovation’

DSP BlackRock Senior VP foresees investor interest in passive funds gaining traction

As Head of Products and Passive Investments, Anil Ghelani, Senior Vice-President, DSP BlackRock Investment Managers, foresees a future where investor interest in passive funds would gain traction. Excerpts from an interview with BusinessLine:

Is SEBI’s new classification norms for mutual funds a bane for product innovation?

No, not at all. Some players were having multiple products in the same category due to reasons such as acquisitions and repositioning. Also, products were not true to label. Now, SEBI has said there should be clear demarcation, and has standardised the definition of what constitutes large-, mid-, small-cap, etc. This way, the investor will have better clarity. These new norms are not stifling in any way.

We don’t launch funds for the sake of launching. Even in the 2006-07 rally, when there was a flurry of fund launches, to take advantage of the fact that they could charge 6 per cent upfront and amortise over three years, we did not launch even one fund.

SEBI later plugged that hole. Because of the multiple funds launched then, many fund houses today have multiple funds in a single category.

Now, everyone has to follow the new norms. On our part, we had to do a few name changes and fundamental attribute changes; but there was no forced merger.

How will the growth path be for passive funds?

Passive funds are for people who want to go for low-cost products. The narrowing outperformance of actively managed large-cap funds vis-à-vis their benchmarks could drive investors to passive funds. Besides, there are two other factors that will help this trend.

One is transparency. In active funds, one has to wait at least till the end-of-the-month fact sheet comes.

Secondly, there is no human bias at any point in time in passive funds. For instance, say, a fund house has a bearish view on the markets. So it sits in a defensive position having 10 per cent cash. Suppose that doesn’t play out and the market rallies. By the time the house realises and realigns, it could have missed out on some part of the rally. Also, I feel the flows for passive funds will come when investors start allocating some amount for passive funds, complementing their usual allocations to other equity and debt funds.

Today, index funds and ETFs (exchange-traded funds) constitute only about 5 per cent of the total AUMs managed by fund houses. How much do you expect it to go up to?

It is difficult to project. Even now, ETFs have garnered so much share only because of large investments from the EPFO (Employees’ Provident Fund Organisation) and the government’s disinvestment programmes such as CPSE ETF and Bharat 22 ETF.

The common man’s interest in ETFs/index funds is just beginning. When we launched our first passive index fund recently, we collected about ₹150 crore spread across 20,000 investors. This is still nothing compared with the ₹90,000 crore of overall AUMs that the industry manages. But this ₹150 crore is the second-largest ever for an index fund in India.

Now with TRI (Total Return Index) benchmarking, the out-performance of large-cap funds will reduce, and this may encourage investments into ETFs.

As the advisory model evolves (when the advisor charges the client for advice), they would want to tell their clients about the lowest cost product available.

Passive funds are not expected to eat into the market share of active funds, because there is a lot of depth and ground to be covered in terms of mutual-fund penetration. Hence, both strategies will co-exist. For those looking for plain-vanilla equity funds, especially in the large-cap space, passive funds could see more inflows.

What kind of smart-beta products do you see evolving in India?

Smart beta essentially tries to bridge the gap between active and passive. These products can be used very effectively as part of an investor’s overall asset allocation, depending on the underlying strategy of the product. Smart-beta products based on structured indices such as those that focus on growth, value, momentum, volatility, size, etc, are available abroad. Multi-factor indices, say, with part growth focus and part value focus are also available.

In India, the mutual fund-to-GDP ratio is currently in single digits; while in markets like the US, it sometimes exceeds 100 per cent.

MF is a push product, and there is a huge untapped market. So, you have to take the simplest of products to start with. The simplest smart beta for us was equal weight. These products will help increase penetration. We are also working on other smart-beta indices such as value index and growth index.

Does India lack good indices compared with foreign markets?

A large number of indices are currently available and new ones are being constantly designed. In terms of the number of index-providers, today BSE and NSE are the only ones on whose indices we have MF products.

A few other companies such as MSCI, FTSE, Morningstar and CRISIL also have indices, but as of now there are no MF products on these indices. However, SEBI recently published a discussion paper on this, and it may soon come out with a regulation for other index-providers.

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