These are tough times for the economy and the Reserve Bank of India’s pause on interest rates has come as a relief. However, only further reforms by the government can signal course correction, says Naval Bir Kumar, president and chief executive officer, IDFC Asset Management Co. Ltd. Apart from the plans of his own fund house, Kumar also spoke about what the new pension reforms Bill, which is likely to be passed in the current Parliament session, would mean. IDFC AMC is one of the fund managers of the New Pension System.
The Reserve Bank of India (RBI) has indicated a reversal of the interest rate cycle. What would this mean for customers?
Generally, in a softer interest rate regime debt funds do well. Hence, we are of the view that the time is perfect for investing in debt funds. This is also the right time to start investing in equities systematically.
Naval Bir Kumar, president & CEO, IDFC Asset Management Co. Ltd
What steps the government and the regulators need to take to propel the economy?
We haven’t witnessed any significant reforms in the last few years. Lack of reforms in areas of agriculture, mining and the labour sector, among others, means that the moment the economic growth picks up, we are saddled with inflation and to control that, RBI increases key policy rates. In effect, it turns out to be a double blow. Thus, the government needs to take up these reforms along with financial sector reforms urgently.
The MF industry has been demanding doing away with the bifurcation of expense ratio for more flexibility in the hands of the fund house for discretionary use. Is there a progress on that front?
The Securities and Exchange Board of India, the capital markets regulator, has set up a panel for the same. The matter is under consideration and we are hopeful that a beneficial solution would be worked out.
The Pension Fund Regulatory and Development Authority Bill, 2011, is set to be cleared by Parliament during the current session. Being a pension fund manager appointed by the Pension Fund Regulatory and Development Authority for the New Pension System, what impact do you visualize?
With two major political parties—Congress and the Bharatiya Janata Party—reaching a consensus on broader parameters of the pension reform Bill, chances of its passage have certainly brightened and we are eagerly waiting for the final outcome. The passage of the Bill would provide the much-needed impetus to the pension sector. But if the level of provision of assured returns is kept very high, life would become tougher for us. Also, a high guaranteed return would mean that most of the investment would be in debt and, therefore, the emphasis on equity investment would be lost in the process.
What will be your fund house’s strategy for growth during the next couple of years?
We would adopt a two-pronged strategy. The balance sheet of tier II and tier III companies has grown sharply in the last few years and they have lots of savings as well. We would try hard to sell money market funds to these companies.
As far as retail investors are concerned, we would educate them about the benefit of investing through systematic investment plans (SIPs). Close to 2% of SIPs get cancelled every month as investors do not understand the real benefit. The cancellation also happens as many MF companies pay commission to distributors upfront for SIPs they bring to their table. As a result, distributors lose interest in pushing investors to continue their SIPs.
Which sector will lead the recovery process? Do you plan to launch any thematic fund?
As a principle, IDFC AMC does not favour thematic funds and that’s why we have not launched any thematic fund till now. The only thematic fund we have is infrastructure fund that we launched two years ago. But infrastructure sector consists of so many sectors that it is thematic only for the name’s sake.
How do you summarize the year 2011 from the perspective of the mutual funds (MFs) industry and its customers?
The year 2011 has been a challenging one both for the MF industry and its customers. Due to poor global economic sentiments, the equity markets remained lacklustre throughout the year and returns have been poor. The slowing domestic economy, as evident in the second half of the year, made the situation even more challenging. As a result, customers largely stayed away from markets and inflows in MF schemes remained subdued.
Also, despite the introduction of transaction fees, distributors are not very happy with the overall compensation model and that too meant low inflows.
Will the scenario change going forward?
In our view, by the mid of next year, we would have a clearer picture about the problems in the Euro zone. Once that happens, markets are likely to head north and even inflows would start trickling in.