Corporate bonds, Reits are alternatives to debt funds: Kotak Cherry CEO Srikanth

Is Kotak Cherry open only to customers of Kotak Bank?

We don’t restrict any customers from onboarding or using any of their bank accounts to transact. But our focus remains that Kotak Bank customers take advantage of this first. We allow customers to even link their UPI (unified payments interface) account as long as they transact through Cherry.

Which products have so far seen most interest on Cherry?

The two biggest segments of traction so far have been mutual funds and bonds. It’s a very interesting scenario: three months ago, we used to see a lot of traction in stocks. But for the last two months, stocks are among those seeing lowest traction. Investment in bonds, which used to be in single-digit percentage, has risen to about 25-30%. Mutual funds are about 45-50%, and the rest is stocks. So, it’s mutual fund, followed by bonds, followed by stocks. We look at clicks to assess customer intent. And in that, mutual funds have seen a lot of traction so far and within that are yield-based and debt-oriented mutual funds. Bonds come a close second, followed by stocks.

Do you see any shift in investor behaviour now that debt mutual funds don’t have a tax advantage?

Investor behaviour towards debt mutual funds will definitely change. At Kotak Cherry, we were seeing good traction in debt as an asset class. Mutual funds were of course the preferred asset class for investors because of the ease with which they could invest and, of course, the tax benefit that came along with it. Having said that, one of our big focus areas where we have already gone live is the corporate bond market. So, what will happen post-this amendment, is that newer product categories will grow.

Investors will only come to debt mutual funds now if they find value there, and not just for tax arbitrage. So, fund managers will have to genuinely create incremental return and cannot hope for investors to just come for the sake of tax benefit. This would mean that retail corporate bond market has the potential to grow significantly. These bonds were earlier ignored by investors as buying and selling these were not as easy on the exchanges due to lack of liquidity and price discovery. But as more investors move to this market, the demand-supply dynamics would improve and buying and selling these bonds would become easier.

Then, categories such as equity savings scheme, which has some allocation to debt and balance between arbitrage and equity, should catch the fancy of investors to some extent. And even asset classes such as Reits (real estate investment trusts) where clarification regarding tax treatment of return of capital has now been given, should also see renewed interest. So, bonds, Reits, equity savings schemes, can see interest as alternatives to debt mutual funds. We are present in all three categories.

What products do you plan to launch in the future?

We have two-three products in the pipeline that will go live. It is a question of when we start the journey. One is the National Pension Scheme. Next will be insurance, which will be both life insurance and general insurance. Thereafter, it will be LRS (Liberalised Remittance Scheme). We have given LRS a slightly lower priority because we want to see post-July the implications of the new TCS (tax collected at source, which has been hiked to 20% from 5%) that the Union budget had introduced. So, depending on whether the traffic to LRS is substantial or not, we will take the decision on whether we advance or postpone our LRS launch.

How do you plan to use RIA (registered investment adviser) licence?

As and when we start using the RIA licence, (which has been obtained in the name of parent company KIAL), subject to necessary approvals , we can go beyond curating mutual fund baskets. But as a mutual fund distributor, you can always have a long-listed or short-listed set of funds. We can then have a multi-asset class basket and also create a personalised basket for each investor.

How many customers do you expect to onboard over the next few years?

We already have about 250,000 customers. This is without us doing anything in terms of customer engagement. But this question will start losing some of its relevance as we move forward, as we are now actively engaging with Kotak Bank’s customer database. In some sense, the overall customer base of Kotak Bank is the potential customer set for Cherry. So, currently 2.5 lakh customers have onboarded (customers that have completed the mandatory know your customer, or KYC process) on Cherry. But as we integrate more and more seamlessly with our bank—we have already started the process —these numbers will substantially move closer to the bank customer base. That is the immediate opportunity size for us.

How do you plan your product pipeline?

We want to prioritize products that we think are right for the customer. So, for example, we prioritized bonds when a lot of traction was around stocks and mutual funds because we think the fixed deposit market in India is 20 times bigger than even the mutual fund market. And in this kind of market scenario, where yields are giving almost a 7-8% annualized returns and investors are seeing weak returns in equity for the past 12 months, it usually acts as a good catalyst for investors to move from equity as an asset class to debt. So, we look to offer reasonably good quality credit, reasonably good yield to investors, that is how we choose our bond offerings.

Similarly, Reits, InvITs (infrastructure investment trust) and ETFs (exchange traded funds), which we are already offering, is a big focus area for us. We think similar to developed markets, Indians are now realizing that most of the mutual funds and PMSes sometimes give returns that are just marginally above Nifty 50 Index and there are periods of time when some of them even struggle to beat Nifty 50 Index.

Our core philosophy is that it is not an ‘either-or’ decision. You require a combination of both passive and active funds.

We think that the passive category, which is still quite small in India, will have greater ability to compound in terms of its future growth. So, our focus on index funds, passive funds and ETFs is going to be very high. Our focus on Reits, we think, will provide a great opportunity for investors to buy high-quality real estate, commercial real estate and receive cash flows in the form of dividends. We have seen both private and public enterprises wrapping many of their cash-rich assets into an InvIT structure.

What kind of asset size are you targeting?

At present, the assets under management is not an important parameter for us to measure ourselves against. We are not actively tracking that number. What is more crucial is the number of customers. In India, investors would prefer credible names to park their money for their long-term investments. But they often get services from firms whose brands they don’t typically associate with financial services, or those that don’t have the same technology focus.

With Kotak Cherry, we are trying to mix the two, as there is Kotak’s brand association and Cherry’ technology focus. So, as we get scale, as Kotak Bank customers get exposed to Cherry, we want to look at a significant portion of the 2-2.2 million SIPs (systematic investment plans) that are opened month-on-month in the mutual fund industry, instead of focusing on share of the monthly SIP flows of ₹12,000-13,000 crore, which is more of a consequential number, as we see it.