Mumbai: While investment research firm Morningstar believes that the big positive for the Indian mutual fund industry is the new investors, it also believes that installing a true investor mindset is a challenge, said global chief executive Kunal Kapoor said in a joint interview with Aditya Agarwal, managing director of Morningstar’s India unit on the sidelines of Morningstar Investor Conference in Mumbai. Agarwal thinks fund managers can do more on the due diligence front, while selecting stocks. Edited excerpts:

How do you view the Indian mutual fund industry versus the global industry?

Kapoor: I think one of the big positives is the mutual fund industry in India is bringing in a new set of investors who may be either have largely used banking products historically. Mutual funds have made investment more accessible across the world, and I think it is no different in India. I think in terms of challenges is installing a true investor mindset. A lot of people relate investing to “can’t lose" proposition and the reality is investing in different asset classes brings different kinds of risks.

Aditya Agarwal, managing director of Morningstar India. Photo: Abhijit Bhatlekar/Mint
Aditya Agarwal, managing director of Morningstar India. Photo: Abhijit Bhatlekar/Mint

We have had a lot of first-time investors coming to the market. With the recent correction, they are seeing negative returns. Do you think this will impact the addition of new investors?

Agarwal: I think it might impact the investors who have invested for the first time in mutual funds and they will see negative returns, but I think that is where the financial advisor has a role to play. I think he or she should be able to educate the investor and hold him for the long term. It is really important for organizations like ours to educate the investors.

Sebi has cut down total expense ratio (TER ) for fund houses. You had flagged that India is one of the most expensive markets in terms of expenses. What are your thoughts now? Does this mean that small fund houses will see more relative inflows than before?

Kapoor: I think in general, low fees are always better for the investors. I think the best thing that Sebi is doing is that they are thinking about it from an investor’s perspective. You also want to the set the market up for a natural competition. It is the driving force. While I think a lot of players may not like what Sebi is doing, competition would have done it anyway. It’s true about every market that we operate in.

But, fund houses aren’t happy.

Kapoor: That is a very short-term reaction. Ultimately, as the pool grows, because more industries come in, more assets come in, everyone is a winner and so, I think it’s not a question about being happy or not being happy. The question is –Is it good for investors or not? If it is good for investors, everyone who is a stakeholder in investor’s success is going to win over time. Sometimes, you take a short term-pain.

ETFs have not been popular in India compared to the rest of the world. Why is that the case?

Kapoor: If everything is rising, active is rising, your compulsion to change the gear is less compelling. I think about the argument on ETFs, they have done well in places where there is a tax benefit on it. Some markets favour ETFs; US is an example from tax perspective.

ETFs will grow here, but perhaps they don’t have a natural advantage as they do in some of the other markets.

Do you see consolidation in the Indian mutual fund industry going ahead?

Kapoor: That seems inevitable to me. Globally, we will see more consolidation.

We had certain companies such as Amtek Auto, IL&FS that went through troubled times, and lot of fund managers were caught off-guard. Do you think fund managers could do more in terms of their due diligence?

Agarwal: I think fund managers can definitely play a much important role as far as due diligence in concerned. Not talking of these specific companies, but If you look at the portfolios like small cap funds, you will find all types of stocks here. I think asset managers can definitely do a much more thorough analysis than they are doing now.

If India were to have a ESG-focused fund, do you think investors will have an appetite?

Kapoor: Often, the question is, what are the reasons as to why do you want to have an appetite. For e.g. Pollution is such a big issue here. I think it is inevitable that people will start wondering about it. Often, it takes large pension funds to move in that direction. If good governance leads to better returns, why is that not compelling?

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