BackTech will cut costs, bring in investors
Simpler entry process, and continued good performance, will attract investors, say panellists
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Market volatility now stems from domestic as well as global events, and the fund management industry has to navigate through these currents. Panellists from the fund management industry who attended Mint’s annual mutual fund conclave on 20 July in Mumbai, said that not only are they well placed to ride the volatility, but that retail confidence in the instrument will continue.
The speakers in the chief executive panel discussion, whose topic was ‘New age challenges to an old business’, were Leo Puri, managing director, UTI Asset Management Co. Pvt. Ltd; Nilesh Shah, managing director, Kotak Mahindra Asset Management Co. Ltd; Nimesh Shah, managing director and chief executive officer, ICICI Prudential Asset Management Co. Ltd; Sundeep Sikka, executive director and chief executive officer, Reliance Nippon Life Asset Management Ltd; and Swarup Mohanty, chief executive officer, Mirae Asset Global Investments (India) Pvt. Ltd. The moderator was Ira Dugal, deputy managing editor, Mint.
Chitra Ramkrishna, managing director and chief executive officer, National Stock Exchange, started off the conclave with her views on retail participation, role of financial technology (fintech) companies and the industry’s response to it. “The challenge has always been how to increase retail participation and bring in savings into mutual funds, because 50% of savings continue to be in physical assets."
While numbers are growing—including assets under management (AUMs), folios, inflows—these are a given now. The next step is to look for trends and read signals that can change the paradigm. One of these trends is the role that fintech can play. It will change service delivery models, help scale up business and improve cost models so that accessibility increases. “Cost of acquisition (of a customer) can be one-tenth of what it is today," she said. To build scale, and for the ultimate customer, products will have to be simplified.
Regulation will also improve. The industry should be able to give some key assurances to the investor. “If we thought that the regulatory burden has been overdone in the past 10 years, in the next 10 years, customers will demand more regulations, more governance, and more confidence. This is true for all financial products," she added.
Another significant trend is entry of retiral savings into markets. While such participation happens on a large scale in many developed markets, it has been small in India. “That pipeline is built to channelise retiral savings into the market," she said, adding that the role of these savings can be larger in the coming years.
Edited excerpts from the discussion:
Dugal: A lot of retail money has come into mutual funds. How much of the credit for this goes to the industry?
Nilesh Shah: Things could not be better. Investors are behaving in a mature manner; often, more than fund managers. They are investing in SIPs (systematic investment plans) and in diversified funds rather than sector specific funds. The first time we reached 27,000 (index level), 34,000 crore came in 6 months before that. When we again reached 27,000, in November 2014, only 10,000 crore came in 6 months before. So, markets are moving up even with limited flows. Moreover, in composition, this 10,000 crore is heavily tilted towards pure equity and SIP, and it is reduced to some extent due to arbitrage fund reduction. If I adjust for that, the number might be 15,000-16,000 crore. The 34,000 crore was more towards balanced (funds) than SIPs.
Dugal: What changed? Was it that people weren’t making money in gold and real estate? Or is it also because of the macro environment, and the way the industry is marketing its products?
Puri: It’s a combination. There is movement out of physical assets into financial assets. We can’t take any credit for that. Neither can we take credit for the election of a majority government with a reformist agenda. What we can take credit for are two things. First is the change in distribution approach. Misgivings about mis-selling have been largely put to rest. The level of trust in the industry has gone up. Alongside that, considerable investment has been made in investor education and outreach. The second thing is continued good performance. The industry has done remarkably well compared to most measures such as benchmarks and compared to other countries. That’s why we are doing relatively well, though not as well as we could do.
Dugal: What are on the ground people telling you?
Nimesh Shah: We have created a set of happy customers. With the change in regulations, it (mutual funds) is the best possible product for retail investors. With the increase in investor awareness, the common man now knows about mutual funds. For example, my yoga teacher says yoga is like SIP. The advertising agency also says there is no need to explain that SIP is systematic investment plan.
Also, investors are aware that they need to beat inflation is increasing. But direct equity is not picking up as much. Many BSE and NSE brokers want to set up mutual fund distribution outlets. Every media (organisations) now have a personal finance section.
There is more realisation that savings have to be converted to investments. And with interest rates going down, this is going to increase.
Dugal: Is this sustainable?
Mohanty: What we have seen is that in the past four years, investors and advisers have been aligning themselves to a common financial goal. A fair amount of money is coming in. Now the onus lies on us because of the big debate of investment returns versus investor returns. If this time around we give investors their desired experience, this is just the beginning.
Dugal: Have we really gone over the hump of mostly physical savings?
Puri: Asset allocation will always be a function of the macro environment. So, I don’t think we will see a secular trend that says there is only one direction. But what has been proven is that as a country becomes a middle income country, you see a shift in household savings towards financial asset creation. Depending on the level of volatility, there will always be a role for assets such as gold. But in a country where we see an opportunity for perhaps another 80-100 million households joining the middle class, it is a very significant shift. And, against a backdrop of reforms.
The global scenario, however, is a threat. We are in the best and worst of times. The paradox is that we have never had a better situation in India, but unlike China, which grew at a time when there was stability and people were willing to build global supply chains, none of that is true anymore. Those are events that we can’t control, so we have to mind our shops.
Dugal: How much of a role does penetration play? Has B15 started to pay dividends? Does the regulator have any credit in this because it pushed for this?
Sikka: Yes, Sebi (Securities and Exchange Board of India) did a good job of nudging the industry to go more retail, but you can’t take away the credit of those who were already operating in those markets. It’s not just that Sebi pushed, the potential was also there. Retail, as per Sebi’s definition, in B15 is 23.9 million folios, which is more than the 23.7 million folios in T15. As an industry, we have been focussing on T15. But fund managers are all looking at rural India. In fact, it amazes me as a CEO, how some mutual funds did not go there. We should do away with this (term) B15, because there are investors sitting in Mumbai also who are naïve.
According to data, as on March 2012, of the 28 schemes that had 5-star ratings, only six had five stars at the end of June 2016. Six schemes had dropped to four stars, 14 are at three stars or worse, and two schemes have been merged or closed due to AMC (asset management company) takeover. In the same period, 14 schemes moved from having one, two or three stars to five stars.
My point is that investors must know that they should not chase returns of the past one or two years.
Dugal: How much is the incremental flow from outside the main centres?
Mohanty: I will go back a step. There is no relation between size and niche. We are product centric. At our level, we don’t believe in a complete brick-and-mortar business. One example is redbus.in overtaking bookmyshow.com in number of transactions, and that 60% of those transactions happen in our B15 cities. If we were to make a strong product track record, the communication will go there. We are T15, B15 agnostic.
The way mutual funds are communicated in the next 10 years will be the opposite of how it has been done in the past 10 years. When I was joining Mirae Asset some five years ago, my global head asked me, “How long will it take for your product to be known across the country?" I deliberated and asked him, “How long will it take in Korea?" He replied, “Half an hour." That is when the thought process emerged that it is just going to be five years when this will be available on the mobile to everyone.
Our aim is to build a good product basket. We are a little miffed with the regulator here because we had thought that in 15 years we will say that we are the only fund house with one product per category. But the regulator has started fund consolidation, which is taking away our USP in the long run.
Dugal: Will changes in distribution and technology lead to a change in products?
Nilesh Shah: There is no homogeneous set of investors. But some trends that are visible and will get accentuated over time are: first, using technology to cut down cost and maintain margins. Most mutual funds have infinite RoEs (return on equity); where in the world can that happen? Second, as of today, we have about 4-5 million unique investors in mutual funds. The potential is 250 million. I will have to create an army of people, like the insurance industry has, or I will have to use technology so that I can have a force multiplier effect. In fact, I will have to do both—have more agents and equip them with technology. Third, I will have to simplify products if I want to become mass market. For niche, the current situation can continue. If you have two large-cap funds, why don’t you merge them—the regulator is already asking this. Fourth, is creating solutions that will create long-term relationships with the customer. We now have about 10 million-plus SIPs coming through. If I assume that each person gives 10 SIPs, then that is 1 million unique customers. But of the 5-million customer base, only 20% are regular SIP investors. The average stay of an investor in a scheme is 2-3 years, not 20-30 years. I have to use technology to convince them that this is not a transaction but a relationship.
Dugal: How keen are these platforms to actually sell mutual funds?
Nimesh Shah: Why only platforms? More than 300,000 new people come of our site every month. But I can’t convert even 3,000 of them. If on Flipkart, they asked for KYC (know-your-customer) papers the way we do, they would have never grown. The base reality is that there is a complicated KYC process, and which is not allowing the common man to come into the market. The regulators need to come together and say that if a person has a bank account, he does not need to go through KYC again with a mutual fund. This itself can grow our online business many times. Distribution is not lucrative enough to have an army of people becoming mutual fund distributors. The two challenges I see are KYC requirement and number of distributors. Our mindset is of a manufacturer, and not a distributor. We don’t talk about the customer’s requirement. That someone else has to do.
Dugal: Will technology nullify some of the advantage that the large incumbents have?
Mohanty: Anyway the market is getting flattened. The requirement has shifted from what is new to what is good. What worries me is the use of the word ‘disruption’. It’s a time game, and not something that happens overnight. While technology will be an enabler of transaction and its ease, advice is a grey area. We have pedigreed advisers who have 20-year track records. The new category called RIAs (registered investment advisers) and the technology platforms also have to do it. While as manufacturers or fund managers we should concentrate on educating all of them, time will tell which one of them lasts.
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