Sundeep Sikka, executive director and CEO, Reliance Nippon Life Asset Management (RNAM), believes what is good for the investor is good for the industry. It is in this spirit that he steers RNAM’s retail-focused growth. With presence in 100 locations where no other AMC is present and 3 million SIPs that contribute over ₹10,000 crore on an annualized basis, the company is proud of the contribution it has made to increase the reach of mutual funds
What is the status of the sale of Reliance Capital Ltd’s stake in Reliance Nippon Life Asset Management to Nippon Life Insurance Co.?
Reliance Capital has communicated to the stock exchanges that it has offered JV (joint venture) partner Nippon Life the option to buy out its stake. Discussions are ongoing and there’s nothing new to add at this point of time.
Nippon Life is a valuable partner in two JVs with Reliance Capital—in asset management and in insurance. It came into the AMC with 26% in 2012 and has increased its stake in stages.
I wouldn’t like to comment on reports about other foreign investors being approached for the stake sale. As a listed company, a number of big global investors are already invested in RNAM. Since our listing, various international investors have shown interest and their interest goes beyond this specific transaction.
Did the recent rationalization of costs hurt RNAM more, given its retail focus and dependence on the retail distribution channel?
Our primary focus has always been on IFAs (independent financial advisers). But it is also important to recognise support from partner banks. Reduction in TER (total expense ratio) and banning upfront commissions are both good measures for the investor and what is good for the investor is good for all the stakeholders, including distributors and asset management companies (AMCs). The reduction in TER is a reality and the way to compensate is to increase volumes and improve operational efficiency.
We are happy to see the retail portion grow and are proud of the contribution we have made to increasing the reach of mutual funds. Today we are present in 100 locations where no other asset management company is present.
This is a business in which you have to invest for the long term, especially when you are building up a retail book—this is not easy. Our focus has been on building the SIP book and today we have 30 lakh SIPs that contribute over ₹10,000 crore on an annualized basis.
Technology is one big area we are investing in: over 31% of our transactions are through the digital platform. This improves operational efficiency and brings down costs.
How do you approach the complicated task of taking debt products to retail investors given that debt investing is nuanced?
Nothing is easy when you are acting in a fiduciary capacity. The infrastructure we have created to help fund managers make the right decisions is because we recognise our responsibility in our fiduciary capacity to 8.8 million investors. We have not been involved in any accidents that have happened in the industry. Our trustees believe that we need to have a conservative approach for debt as investors may not realise there is a downside risk—just like in equities—as they view debt MFs more like fixed deposits.
If you are taking debt to retail investors, it is important to have research capability. In our 18-member debt team, 11 are analysts. We have a separate head of research. A large research desk is neither a regulatory requirement or an industry norm. We do it as part of our internal risk management process. We believe that in our fiduciary capacity, we have to take all the protection.
Moreover, unlike equity markets, debt markets are not liquid which makes selection important. We have developed our own rating capabilities too. We track the downgrades to upgrades in our portfolio and for every one downgrade, there are 2.64 upgrades in the last financial year; 92% of our portfolio is AA- and above. It is a very conservative approach. This is about managing risk and not about higher returns. The core for any AMC is the risk management framework.
How do you align product offerings with investor interest? Is India a developing market for passive investments?
We are a balanced fund house. We believe any portfolio needs debt, equity, money market and commodities. We believe in having the investor at the centre of all our strategies. We have seen our equity assets increase from 34% of overall assets to 38% in the last 12 months. But we do not want investors to create a portfolio of only equity assets. Like a balanced meal, there should be a little of everything—equity, fixed income, gold and commodities. We offer everything that the investor may need and let them choose. We also have a US fund, Japan fund and a Hang Seng fund to give investors options for geographical diversification. You offer a scheme if there is a need for it in the investor’s portfolio and you can add value, and it is scalable and not cyclical.
As for passive investments, markets will keep maturing. There are the educated, savvy investors who look at ETFs (exchange-traded funds), especially in large-caps where alpha generation may reduce and higher expenses may eat away the returns. When we acquired Benchmark and Goldman Sachs, it was a ₹7,433 crore portfolio. Today, we are in excess of ₹29,000 crore. Today 90% of the traded ETF volumes on the stock exchanges are our ETFs. This is critical because there are two things that matter most to ETF investors—tracking error and impact cost. And impact cost reduces when there is greater liquidity. As much as 56% of the total ETF investors in India are RNAM investors.
Do you see a crisis of confidence in the mutual fund industry as far as investors are concerned with all the recent negative news such as the emergence of poor quality bonds in the portfolios of debt funds and slowing inflows?
I don’t see these events permanently keeping investors away. On the contrary, I see a great future for the industry. Whether it is the assets under management (AUM) of the industry as a percentage of GDP (gross domestic product) or as a percentage of bank deposit, they show there’s significant headroom for growth. The industry has added more than a million SIPs (systematic investment plans) in the last year—this is encouraging as market returns have not been the best, given the volatility.
RNAM’s focus is retail and we see no slowdown in flows. We continue investing in the growth of the industry. The reality is that MF investing has become a household phenomenon, even in small towns.
Are trends like mobile apps and direct investing bringing in “hot money" into the industry? How do you see the future of MF investing through the direct option?
Investors who use these apps are self-directed and there is no reason to believe that they are any less sticky than others. One has to recognise that, on the one hand, in India you have Bharat and a generation of investors who still like to come to the branches and visit distributors. And then there is the new generation of investors who are comfortable with mobile technology. We have to cater to both these segments.
At any given point of time, investor behaviour will always depend on market conditions and that is why it becomes critical to have access to advice. Direct investing can be good for 1% of the investors who know what they want. But our interactions with retail investors say that most do not know what they need and the advisors and distributors help them direct their savings in the manner that is most beneficial to them to achieve their goals.
If there was one reform that you would like to see implemented soon, what would it be?
Easy on-boarding of investors is important for the industry to grow. Today there is a separate KYC for capital markets which is one more step that can actually be eliminated. If a person has a bank account, it means that the identity and address has already been verified with an entity governed by the Reserve Bank of India, then that KYC (know your client) should be universal. Just like the Aadhaar card and PAN (permanent account number) card are standard documents for all transactions, so should KYC process be too.
Things go wrong in the industry in the race for acquisition of AUM. Another change I would like to see is the disclosure of number of folios and not just AUM numbers. It is a better measure of the investor participation in mutual funds.