Mutual fund is a financial product; it cannot be sold4 min read . Updated: 03 Jan 2014, 07:15 PM IST
You can only make people buy MFs from you when you educate them about long-term investing
In an industry worth R8.08 trillion with 43 asset management companies (AMCs), PPFAS Asset Management Co. Ltd doesn’t want to be just another AMC. Some of the things it is doing to be different include having a mandate to launch a single equity scheme that will invest in Indian as well as foreign securities, and nudging employees to invest in the scheme. Earlier this year, it shut down its portfolio management services (PMS) business and shifted its customers to the mutual fund (MF) setup. While it has its basics in place, the fund house still has to prove its performance. In conversation with Parag Parikh, chief executive officer, PPFAS:
When you launched your fund house earlier this year, you said that an MF was the best vehicle for retail investors. Yet, you had a PMS business for a long time. Then, why did it take this much time to launch a fund house? Surely, you must have had the required share capital (a minimum of 10 crore)?
Yes, we did say that and we have walked the talk. We did exceedingly well for our clients in our PMS business. However, the money management landscape was changing. The minimum requirement for initial subscription for PMS was raised from 5 lakh to 25 lakh. The Direct Tax Code was to be implemented.
Meanwhile, MFs had many tax benefits and the government wanted retail investors to take the MF route.
We had to respond to these changes and, hence, the entry into the MF segment.
Your firm’s employees invest in your own scheme, PPFAS Long Term Value Fund. Is this compulsory? Who must comply?
It is not only the employees who invest, but also me, the directors, the fund managers and the trustees. There is no rule or a compulsion to invest. But how can we ask others to invest when we ourselves have not invested?
According to the fund’s November 2013-end factsheet, about 20% has been invested in international securities. That’s one of the largest such allocations from a diversified equity scheme. Why not just launch a separate scheme that would invest abroad?
An MF scheme should allow the fund manager enough freedom to identify various investment opportunities. We have expertise in analysing businesses. We have been investing in the international markets since 2009.
The idea behind getting into international equities is to get access to companies with innovative products, research-based pharmaceutical companies, fast-moving consumer goods companies that have built on scale, and so on. To give you an example: Nestle India Ltd is available at around 45 times earnings, whereas its parent company, Nestle SA’s American Depositary Receipt (ADR) is available on the New York Stock Exchange at around 17 times earnings. When you buy the parent’s ADR, you are also buying into the Indian arm. Is it not value buying?
In PPFAS Long Term Value Fund, we invest up to 35% in international equities. And at all times, we need to have 65% invested in Indian equities to have the tax benefit.
Most other schemes in this space are feeder funds; they invest into funds in international markets. Investors end up paying the management fees of the parent as well as the investee fund. These funds came up more as marketing gimmicks to catch the fancy of those who wanted international investments.
Are MFs meant to be bought in the hinterland, for instance, beyond the top 15 cities?
An MF is a financial product, and very different from a banking product. It cannot be sold. You can only make people buy it from you when you educate them on the virtues of long-term investing, show them performance and build trust. This takes time and patience.
I have a few principles: Don’t confuse the investor with multiple schemes; keep it simple. Don’t preach or celebrate short-term performance. Invest in your own fund before you ask others to do so. You don’t talk about long-term investing, you just do it. That is what trusteeship is all about. Put the investor before everything. Managing assets is important. But today we lay more importance on gathering assets.
Encouraging more professionals to enter this field will aid penetration in the hinterland. However, with restricted entries, we have created monopolies that have become marketing machines. Their only aim is to increase assets under management. Salesmanship has triumphed over stewardship. We need to correct this.
Y ou said that MFs need to be bought; they aren’t like banking products that can be sold. But aren’t fixed deposits more acceptable to people (because they offer assured returns and are perceived to be safe) than MFs? Financial literacy is also about generational change. How, then, do you find the middle ground?
When I talk about MFs, I mean equity funds. Comparing them with fixed deposits is like comparing apples and oranges. Both have their importance in a portfolio depending upon the risk appetite of the investor.
When you are looking simply for capital protection, go for fixed deposits, being aware of the vagaries of inflation. But if you are looking at returns on your money, go for equities. It is the best hedge against inflation.
This is real financial literacy and every generation can understand this.