How NJ India Invest became India’s giant mutual funds distributor
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Mumbai: The headquarters of NJ India Invest Pvt. Ltd (NJ) in Surat, one of India’s largest mutual fund distributors, looks like it is in the middle of nowhere. As you leave the hustle of the main city of Surat and enter into an industrial town nearby—it’s actually an extension of Surat but comes with its own railway station on the Western Railway—it gets quieter and you see more commercial structures and warehouses than residential homes. But in the middle of Udhna Udyog Nagar Sangh Commercial Complex, the 9-storey part-glass part-concrete façade building—where NJ’s office is—stands tall. Even for those who are close to the Rs20 trillion Indian mutual fund industry, the size of the structure stands out given that the firm was started by just two individuals—Neeraj Choksi and Jignesh Desai—in June 1994, a year or two out of college. It was known as NJ Capitastocks in those days.
The story of Neeraj Choksi and Jignesh Desai—two recent college graduates in 1994 who saw a future in mutual fund sales, which not many others did, and built a business managing Rs47,500 crore in assets under management (AUM) with Rs443 crore as gross commissions in 2016-17—is worth documenting.
Look closer. When the Association Mutual Funds of India (Amfi: the Indian mutual fund industry’s trade body) declared the annual commissions that India’s top distributors and financial advisers received from mutual funds, NJ topped the list for the year 2016-17. This is the second year running in which it has done so; for the past seven financial years—ever since fund houses have been disclosing distributor commissions—NJ’s income has been among the top five in the distribution fraternity.
Choksi and Desai, each, have a sprawling corner office on the ninth floor from where you get a bird’s eye view of Udhna. NJ is headquartered in the top five floors of this building. Here, apart from the staff, it houses portfolios and key information of more than 1.5 million investors—whose investments measure about Rs47,500 crore—saved and stored in massive computer servers. NJ’s 26,848 distributors, whom it calls partners, are part of its network and can plug-in and use this data to service customers.
If NJ were a fund house, it would be ranked No.12—out of the 41 fund houses in India—in terms of AUM. In terms of assets that it manages, NJ is bigger than the smallest 17 fund houses put together.
Smelling an opportunity
Like most successful businesses, NJ entered the industry at the right time, much before the great equity market rally of 2004. Choksi and Desai were college roommates in Vallabh Vidyanagar, a small town in Anand district of Gujarat, where Desai was studying engineering and Choksi was a business management student. Deciding to work together after graduating, they started selling financial instruments as brokers and distributors.
Life was tough. Aside from trying to sell mutual funds out of their initial 3,000 sq ft office in Surat, they also tried their hands at being sub-brokers in equity (where they bought and sold equity shares and initial public offers for their clients), dabbled in selling fixed deposits and tried their luck in car financing. This was around 1995 and close to 11 private-sector fund houses had entered the Indian mutual funds industry in the preceding 2 years. The duo vividly remember selling Reliance Vision Fund (RVF) in 1995, Birla Sun Life 95 (B95: known as Alliance Fund back then) in 1995 and ITC Threadneedle Top 200 Fund (IT200: now, HDFC Top 200 Fund) in 1997. They had got just four applications worth Rs15,000 for RVF and just one application of Rs5,000 for B95.
“We had assembled around 100 people for a presentation that a senior person from ITC Threadneedle had came down to Surat to give. Eventually, we got just three applications totaling Rs13,000 for IT200,” Choksi said. The other mutual fund schemes they sold in those days got similar response. “But we were enthused about this concept called ‘mutual fund’. The professional management set-up, presence of a trustee board who are independent, and so on. The corporate fixed deposits we were selling in those days yielded 17-18% and nearly 10-15% commission to agents. We could tell that interest rates were headed south and the business was not sustainable,” he added.
Vishal Kapoor, chief executive officer, IDFC Asset Management Co. Ltd was the head of sales at ITC Threadneedle Asset Management Co. Ltd, back then. Kapoor remembers making frequent trips to Surat in those days. “The industry was coming off the setback caused due to the debacle of Morgan Stanley and mutual funds were not popular in those days. But Choksi and Desai were convinced about mutual funds and they kept their focus on mutual funds, unlike many other large distributors in those days that continued to sell other products,” said Kapoor. Morgan Stanley Growth Fund was a closed-end fund launched in 1994, with a term of 15 years. On account of its foreign heritage, investors had queued up outside its offices for application forms and many had even bought units in the grey market. But on the back of a lacklustre equity market, its units that were traded on exchanges were at a significant discount to its net asset value (NAV). And since it was a closed-end fund, investors were caught in a dilemma: either exit at an unattractive price or endure the long wait before their units could be sold at NAV-linked prices.
“In those days, it was unusual for even fund houses to have a full-fledged sales machinery on the roads talking about mutual funds. So mutual funds used to find it strange to find people like Jignesh and me, who were willing to talk mutual funds to an audience,” said Choksi, who remembers officials like Bobby Surendranath (a former fund manager at IDFC AMC Ltd), Pankaj Razdan (now chief executive officer and managing director at Birla Sun Life Insurance Ltd), Prashant Jain (now chief investment officer, HDFC Asset Management Co. Ltd) and Nilesh Shah (now managing director, Kotak Mahindra Asset Management Co. Ltd) visiting their office in Surat. “We used to take them to potential customers’ homes; people used to like meeting them and listening to them; some even used to ask for stock tips. But many never invested (in mutual funds). We kept going to their homes for as long as 2 years before they wrote their cheques. We didn’t have much to do back then, so we had lot of time,” said Choksi with a big laugh. Today, he added, many of them are “crorepatis (multimillionaires)” thanks to their investments in mutual funds, which they eventually made, and still do, with NJ.
As tough as it was convincing investors to look at mutual funds, it was also tough getting them to invest in an instrument that could not, and did not, assure any returns. Here too, Desai said, they took baby steps. A chance meeting with Navsari-based distributor of fixed deposits— who himself was cynical of mutual funds— got him in touch with a Navsari-based high networth individual (HNI), who Desai recollected, was willing to give mutual funds a chance. Desai used to, and still lives in Navsari, a town 41km from Surat. “He understood what mutual funds could deliver and their potential,” said Desai. The HNI invested around Rs20 lakh in mutual funds with NJ over a short period of time. The distributor who had introduced the two was impressed, said Desai. He soon requested Desai to send him 100 application forms of various funds that NJ was selling by the time, “Which soon grew to 5,000 and 10,000 applications,” said Desai.
The big leap
The year was 2001. Equity markets were in the doldrums. After going up 64% in 1999 on the back of technology companies, the S&P BSE Sensex fell 20% in 2000 and another 18% in 2001. A year ago, in the year 2000, NJ had started building a network of partners. Typically, distributors who wish to expand, hire people to work for the firm and pay them a fixed salary. But NJ found it better to build a network of partners and share commissions with them. Otherwise called sub-brokers, NJ’s partners were free to sell products that NJ did not at the time. They were also likely to have other professions, for example: running a kirana (grocery) store. “At that time, we had limited capital; we couldn’t afford people to take a salary. A distributor network that could plug and play into NJ would work better since we would keep a share of commissions and pass on the rest to our partners,” says Choksi.
But before they came to a stage where they could dive deeper, they had to choose between equity trading and mutual funds. In those days, as NJ’s business grew slowly but steadily, large brokers like SSKI Investor Services (later known as Sharekhan, which was acquired by France-based financial services group BNP Paribas in 2015) and Kotak Securities Ltd—who wanted to penetrate Gujarat, and in particular the Surat market—were wooing them to become their sub-brokers. One such large broker called Choksi, Desai and Misbah Baxamusa—another senior member of team NJ—to Mumbai one day in 2001 to sell them the idea of becoming sub-brokers. “The broker mesmerized us with big talk, mention of various reports—you know the popular terms for such daily reports: ‘morning coffee’, ‘evening tea’ and so on. We were dazed and wondered what we were doing up until then. But most importantly, do we want to do all that?” said Choksi. Desai added that “a broker’s income comes from churn, but our philosophy was to invest for the long run. By then, we were already convinced about systematic investment plans (SIPs).” The trio caught the same evening’s Flying Ranee train back to Surat and by the time they reached Valsad, a south Gujarat town about 100km from Surat, they had made up their mind to dive into—and focus only on—mutual funds. That’s when Desai and Choksi started to build their network of distributor partners.
NJ’s decision to build a partner network worked in its favour after it built an internal structure conducive to hiring a workforce. Manish Gadhvi, head (Mumbai operations), NJ, joined the company in 2003 as a unit manager, straight out of a management college in Anand, Gujarat. NJ did not go to the top colleges to hire. Gadhvi says that it looked for—and still does—sincerity. Desai said that proficiency in English language is not important—he added unabashedly that perhaps is the only attribute missing from his team—but they should be hardworking and willing to learn. The unmistakable Gujarati accent is visible in almost every NJ employee you meet in its Surat office, and many employees turn up in casual attire. Desai himself was in his sandals, as against the suits of finance in the metros. But today nobody is looking at their accents or clothes. Success charts its own rules.
Unit managers at NJ are meant to recruit partners (each manages around 60 partners), bring them into the NJ fold, train them and make them self-reliant. “We usually keep a target (for partners) of Rs10 crore of AUM and an SIP book of Rs25 lakh in the first 3 years. The target may look stiff but a decent corpus earns them a decent income and that ensures that they don’t leave the business dejected,” said Gadhvi, who had himself recruited around 100 partners in the first year. A distributor partner’s performance is the unit manager’s responsibility. Unit managers come at the bottom rung of the sales division at NJ. They report to branch managers (BM). BMs report to regional managers (RMs) and RMs report to zonal managers. All zonal managers report to Baxamusa.
Gadhvi was not alone in successfully recruiting partners, training them and ensuring inflows. His colleagues who joined at that time were able to do the same. This gave confidence to NJ that their business model was right. “Then, came the great bull run of the equity markets. Our network grew exponentially and so did the business,” he said.
One reason that industry participants attribute to NJ’s success is the presence of entry load. Prior to August 2009, mutual funds were allowed to deduct up to 2.25% of the investors’ investment amount as entry load and pass it on to distributors as their commission. This resulted in money flowing into equity funds as the fund houses launched funds one after another. As per data provided by Amfi, mutual funds collected Rs3.70 trillion between financial years 2003-04 and 2007-08. New fund offers garnered 24-44% of the total equity inflows in these years. “Distributors were amply rewarded in those days and NJ capitalised fully on that. That is one big reason why NJ got a head start over all others. The costs of adding clients were borne by clients. If one were to build that network now, it would be next to impossible,” said Vinod Jain, principal adviser, Jain Investment Planner Pvt. Ltd.
NJ also keeps its costs under control. Two floors of its headquarters in Surat are devoted to its technology team, which is full of young buzzing members that support NJ’s state-of-the-art distributor platform, which functions as every distributor partner’s back office. Apart from generating reports that distributors can show to their clients—such as their asset allocation, latest valuation, scrip- and sector-wise investments—it also shows them how their respective mutual fund businesses are performing. The system is designed to identify—using artificial intelligence—which clients could be sold what sort of products, depending on: age, risk profile and existing portfolio. All this is designed out of Surat by its technology team, which NJ has hired out of the many colleges that have sprung up in Gujarat. Lack of other opportunities for such students in nearby areas also meant that NJ could control the employee costs.
Mutual fund industry officials who do business with NJ vouch for its hunger for learning. A chief executive officer of a foreign fund house told us that as part of another fund house’s (he used to work there at the time), distributor reward programmes, when Desai and Choksi were taken to the fund house’s global headquarters in Europe to attend sessions organised: “They were the only ones in the distributor contingent who were taking notes. They were interested in studying and met many people there,” he said.
The dark side of the moon
Industry sources say that a part of NJ’s success is also because of its stubborn practice to bargain hard. That coupled with its dominant position in the distribution fraternity, say some fund house insiders, gives NJ an upper hand when it gets to fixing distributor’s commission. Apart from upfront and trail commissions, a fund house’s chief executive officer told us that NJ also charges a certain amount of lump sum fee a year and gets fund houses to sponsor the many training activities that NJ often does in its branches.
“In general, fund houses don't make money when dealing with NJ. But then, they do bring in a lot of inflows, which increases the AUM of fund houses. Many fund houses like that,” said a chief executive officer of a fund house who did not wish to be named. Another fund house’s chief said: “The cost of procuring assets is very high. The silver lining is that NJ gets a lot of SIPs, which is very tough to close even if, say, your relationship with NJ gets over. Mutual funds only make money in the long run, because NJ gets us sticky money.”
Choksi and Desai deny the charges vehemently. “If they don't earn money from our corpus, are they mad in dealing with us?” pushed back an obviously irritated Choksi. He said that apart from the mutual fund industry being highly regulated, “Some fund houses also have high employee costs and pay very high salaries to their chief executive officers; others keep such costs low. Besides, there are some funds that route liquid fund inflows through preferred distributors and then pay commissions to them. The latter is a dirty practice. In short, everyone has a different business model. And at the end of the day, we have to also pay our partners— most of whom have stuck around with us for many years. There is the price for quality. We don’t churn existing investments. Our distributors are only rewarded on net sales and not on gross sales,” said Choksi, his anger subsiding a bit.
“Many mutual fund houses do channel conflict. Why do they need to have such a large sales force when they can get the work done out of their many distributors? Networks like NJ give you access to more than 10,000 active distributors through a single-point window. In a small town like Jamnagar, 15-20 fund houses may be present, to service just about 20 odd distributors present there. Why is this needed?”asks Aashish Somaiyaa, chief executive officer, Motilal Oswal Asset Management Co. Ltd. Choksi added that some fund houses also try to poach their distributors by luring them with higher commissions than what they get in NJ network. “We don't appreciate that,” he said. The second AMC chief quoted above said that sometimes large NJ partners also approach mutual fund houses to deal with them directly “because they see a chance of earning more.”
The way it works is like this: NJ, through a combination of its internal research and commissions that fund houses are willing to pay, sells schemes from about 10 fund houses. At present, these are: Reliance Nippon Asset Management Ltd, HDFC Asset Management Co. Ltd, Kotak Mahindra Asset Management Co. Ltd, DSP BlackRock Investment Managers Ltd, Invesco Asset Management (India) Ltd, L&T Investment Management Ltd, Birla Sun Life Asset Management Co. Ltd, Axis Asset Management Co. Ltd, Motilal Oswal Asset Management Co. Ltd, SBI Funds Management Ltd and Franklin Templeton Asset Management (India) Ltd. Based on the revenue-sharing model it has fixed, its partners get their share if they sell schemes from the so-called preferred list of funds. Although distributors are free to sell other fund houses, Gadhvi says that there is a chance that distributors may not get as much. “My preferred set of AMCs anyway pays us more than those who are out of the list. So distributors automatically earn more. But as all fund houses, whose funds get sold on our platform, pay us commissions and if our distributors sell those, they would earn less because we retain our share and pass on what remains. Hence their share goes down,” said Gadhvi. “Plus, NJ runs contests. Some of these are annual and partners get a lot of recognition in the system. The funds that earn us points in such contests are also only those in the preferred set,” said an NJ partner who did not want to be quoted. Fund houses, though, vouch that NJ gets sticky assets; many of its investors stay invested for a long time.
Apart from taking a tough stand on the bargaining table with fund houses, Desai and Choksi also believe that more than the choice of schemes, it is the asset allocation that matters most. “That confidence also leads to NJ breaking away from fund houses, large or small. They have confidence that due to asset allocation, they can generate returns without big names,” said the first chief executive officer quoted above. For instance, ICICI Prudential Asset Management Co. Ltd is conspicuous by its absence in the NJ fold. NJ shared a frosty relationship with Franklin Templeton Asset Management (India) for many years; the latter only recently made it on NJ’s list after a change in some areas of senior management at Templeton.
Another chapter of NJ’s growth, industry insiders say, can also partly be attributed to its aggressive assets “shopping” that some mutual fund industry officials say, happened around 2007-09. Since the days when Amfi first issued a code of conduct in 2001, it mandated that if investors wanted to change their distributors, they need to get a no-objection certificate (NOC) from the first distributor. In September 2007, it abolished the need to get the NOCs after receiving feedback on how investors were forced to stay with distributors despite lack of service. Trail fee was supposed to be paid to the new distributor as per this Amfi guideline. Some fund houses started to transfer change requests, others ignored because of a strong distributor lobby that compelled fund houses to not change because they didn’t want to stop earning trail fees. Finally, in December 2009, Sebi banned NOCs, but was silent on the trail fee issue. It was said at the time that NJ’s partners, and many other distributors, had aggressively sought out new investors and made them transfer their assets from their erstwhile distributors to them. “A large bank and NJ had inflated their AUM by this method in those days,” said a mutual fund distributor who did not wish to be quoted. An NJ partner who we spoke to us also confirmed that he too had acquired customers in those days and still does “because it’s always better that one distributor serves you instead of five.”
Finally, in May 2010, Amfi clarified that if an investor transfers her assets from distributor A to B, none of the two distributors would earn a trail fee on existing assets. “We did not poach any clients. But if an investor wishes to transfer from distributor A to B, why shouldn’t the new distributor earn trail fees on past assets? In those days, lot of noise was made. But actually, there are many investors who go to multiple distributors. It’s better for the investor to stick to just one distributor so that this distributor can give a holistic view of all the investor’s investments. In all this, some transfer did take place; my distributors are like any other distributors. If he sees an opportunity somewhere, how can I stop him?”, the partner said.
Desai’s and Choksi’s supreme confidence in getting sticky assets is reinforced in NJ’s numbers. While the mutual fund industry gets roughly Rs4,800 crore through SIPs every month, NJ alone gets 11% or Rs542.48 crore. As opposed to 14.7 million SIPs that the industry has, NJ has over 12% or about 1.86 million. As opposed to about 125,000 distributors in the mutual fund industry (active and passive), NJ has 21% or 26,848 distributor partners.
Apart from keeping its costs in control, NJ also supports various educational ventures as part of its corporate social responsibility activities, such as sponsoring education of close to 507 children who are orphans or single-parent kids, a charitable centre in Udhna next to NJ’s office where it identifies academically bright kids from about 15 schools based in Udhna and then provides them free and extra coaching classes in subjects like mathematics and science. On a Friday afternoon, the coaching campus that NJ runs—complete with classrooms, computer labs and a cafeteria, all sponsored by NJ—was buzzing with students in the middle of their sessions.
NJ’s main focus continues to remain mutual funds, although it now does a little bit of real estate and also offers loans against mutual fund units. Ahead of most of its rivals when it comes to using technology, NJ will stop accepting offline mutual fund applications from January 2018. Its online mode of investment—you need to have a demat account and units are bought and sold on the BSE Star Mutual Fund platform—will now get a further boost as it gets ready to roll out its tie-up with the National Payment Corporate of India Ltd for e-mandate facility to enrol SIPs online, paperless and therefore faster; the first distributor to do so yet.
The success of NJ breaks many myths. That you need to be in Mumbai to be in the financial sector. That you need rocket science degrees to make money. That finance is a zero sum game. NJ shows how the seller and the investor can both win.