Panel Discussion | Mutual Funds – The Road Ahead
Panel Discussion: Mutual Funds – The Road Ahead
Mr. Sandeep Sikka, ED & CEO, Reliance MF
Mr. Nilesh Shah, MD, Kotak Mutual Fund
Mr. Leo Puri, MD, UTI Mutual Fund
Mr. Kalpen Parekh, President, DSP Blackrock Investment Managers
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Mr. Sandeep Sikka, ED & CEO, Reliance MF
Mr. Nilesh Shah, MD, Kotak Mutual Fund
Mr. Leo Puri, MD, UTI Mutual Fund
Mr. Kalpen Parekh, President, DSP Blackrock Investment Managers
#PanelDiscussion #MutualFunds #Money #OutlookMoney #OutlookMagazine #OutlookGroup
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NewsTranscript
00:00 At the outset, may I say that this is probably the most looked forward to panel.
00:16 Most people have told me they have really come for this panel.
00:18 So very happy to be moderating this panel.
00:22 And I will start this panel by saying that there's been a lot of volatility in the markets
00:31 in the last few months.
00:33 And so I'm going to start with my first question with Mr. Nilesh Shah.
00:38 He's the man of the moment.
00:39 I've told him that a while ago.
00:42 There's been talk of a downgrade of India's weightage on the MSCI index, and his one column
00:48 has pushed back that decision.
00:51 So the question that I have for you is that last year was a great year on the Indian markets,
00:58 and the retail investors have come in hordes, and that's a good thing.
01:02 The equity cult has been going far and wide.
01:05 SIPs have been dominant each year in the last one year after demonetization.
01:11 Do you think that this will sustain and the investor faith will sustain?
01:16 Hello, sir.
01:19 Do you see this sustaining, and will the retail investor repose his faith given the kinds
01:24 of changes that are happening in the market and the market's going through a slightly
01:28 turbulent phase?
01:31 So we believe regulators, manufacturers, and distributors put together have worked over
01:40 the last 20 odd years to ensure that this momentum continues.
01:46 2017 was a year devoid of volatility.
01:52 2018, by and large, will be volatile.
01:57 But I think between regulators, distributors, manufacturers, and to some extent even media,
02:04 we have created a platform where by and large people know that equities will be volatile.
02:12 You will have time period where they can give negative return.
02:15 But if you maintain the discipline of regular investment, long-term investment, and asset
02:21 allocation, you will eventually get good return.
02:25 Second, I do foresee that alternative investment options like gold, real estate, and fixed
02:32 deposit will still continue to push people to equity by virtue of potential return in
02:38 equity despite volatility.
02:41 So we do get support from the Tina factor or there is no alternative to mutual funds.
02:49 Third, the campaign unleashed by MFI, Mutual Fund Sahi Hai, is also working out well and
02:57 it's bringing investors from Nook and Corner of India into Mutual Fund Kitti.
03:03 The only small obstacle which I'm seeing today is that regulators have created non-level
03:10 playing field between mutual funds and ULIP.
03:14 When you move between equity and debt in ULIP, it doesn't get taxed.
03:18 In mutual fund, it does get taxed.
03:21 When you withdraw money from mutual funds, you pay capital gains tax, short-term or long-term.
03:26 In ULIP, that's not paid.
03:29 So there is a normal race being run by ULIP and a hurdle race being run by mutual funds.
03:36 Subject to that, I think we are geared for volatility.
03:41 Will there be some drop here and there?
03:44 Yes.
03:45 But the core engine of mutual fund collecting money from millions of retail investors, utilizing
03:51 that financial savings for investment in capital market, I think that will continue.
03:56 If mutual fund Sahi Hai is going to remain Sahi for the foreseeable future?
04:03 Undoubtedly, as long as, one, we can continue to manage money unlike some of the, you know,
04:15 Western world counterparts.
04:17 So majority of fund managers in Western worlds are underperforming their benchmark indices.
04:23 Indian fund managers will have to maintain the tradition of outperforming benchmark indices.
04:28 Second, we will have to come out with relevant products for our customers.
04:33 Over a period of time, we have seen evolution of multiple products, duration to credit from
04:41 liquid fund to long-dated gilt fund, from balanced advantage fund to aggressive balanced
04:48 fund.
04:50 So we have launched number of products and we will have to continue to launch products
04:53 to service the needs of the customers.
04:56 As long as we have products which serve the need of the customers, as long as we have
05:00 fund managers who can deliver value to the customers, and as long as we have distributors
05:05 who can carry that message to the investors, I think the future of mutual fund industry
05:09 is Sahi Hai.
05:10 Lovely.
05:11 Sandeep, what do you have to say about the recent LTCG tax that has been imposed?
05:17 What does that do for investor confidence because you are going after a much wider audience,
05:22 people who might be sensitive to returns, who may not have a very high risk appetite
05:27 because what this does is that your returns have to be higher in that case to justify
05:33 the tax as well as give something in the hands of the investor.
05:36 How do you see that playing out on the investor psyche?
05:39 I will just continue with the earlier question which you asked before I come to this.
05:46 I think we are going through very interesting times.
05:50 The mutual fund today is becoming the first preferred step for anybody to come into the
05:55 capital markets and I think what Nilesh mentioned about the TINA factor, I take it the other
06:01 way around that I think even if one is a TINA factor, standalone this product is so good,
06:07 I think there is no reason why more and more investors will not come into the mutual fund
06:10 industry.
06:11 I think it is very interesting, I mean while we have been all seeing very good times in
06:16 the mutual fund industry, for me having spent two decades in this industry, I have just
06:22 seen one thing, all of us as manufacturers, distributors, we are doing the same job for
06:25 many years but two things have changed in the last few years.
06:28 One was the demonetization, another one I think we cannot undermine the role of media.
06:32 I think the way they have started talking about mutual funds because there was always
06:36 wealth creation which was happening but I think today taking it to retail, talking about
06:41 this conclave like this, you are taking it to the retail level where people have to be
06:44 made aware what mutual funds can do and I am saying the other way around now, what do
06:49 you miss out if you do not invest in mutual funds.
06:51 So that is the great thing that the media started doing and why I gave this background,
06:55 I think I personally believe LTCG, a lot has been talked about and the way I see it, it
07:02 is a little different.
07:03 I think in India the mutual fund investors, if you see 2% of the population has been investing
07:08 in mutual funds and majority of these investors till now were looking at either gold, real
07:14 estate and when this money comes into mutual fund industry, even after the LTCG, I mean
07:20 the kind of returns the mutual fund industry can generate, this 10% does not impact.
07:25 And also the way I see is I think you have to divide the industry in two parts.
07:29 One is the savvy people who typically watch the business channels, look at the market
07:35 movement every hour.
07:36 For those people, yes, it matters a lot but I think if you look at the real Bharat, I
07:41 mean the small investors who are investing 500 rupees, 1000 rupees in SIPs, for them
07:45 it does not matter.
07:46 I think we have been investing, our investor class is very different.
07:50 We are in a lot of our SIPs that we do are 50 rupees, 100 rupees, 200 rupees SIPs.
07:55 For those investors it does not matter whether LTCG has come or not come.
07:59 So I think I clearly see the opportunity in India, the ghost story is intact.
08:02 I think it will keep getting better and mutual fund industry, rather I put it the other way
08:06 around, mutual fund industry is going to be driving the key chain in the Indian capital
08:10 markets and now mutual funds is going to and SIPs is going to become a part of monthly
08:14 wallet for every Indian.
08:16 So I think I don't see a very big impact.
08:18 A lot of people, intellectual people will keep talking about LTCG.
08:22 I think it is not going to impact the real Bharat where I think I for me, that's the
08:27 audience for mutual funds in India.
08:28 Would you agree Mr. Puri on this one that the investors will keep their faith despite
08:32 you know kind of a mismatch that has been created between the insurance investment products
08:38 which is ULIPs and mutual fund.
08:40 Do you see investors gravitating towards that or do you see this trend of more money coming
08:46 into mutual funds continuing?
08:47 I think they are always going to be competitive products, substitute products and at different
09:04 points in time people are going to look at all of them.
09:06 I think mutual funds and insurance products will always in a way compete for each other.
09:13 And insurance actually where it is genuinely insurance is serving a different purpose.
09:17 So I think it is wise to actually have some exposure towards insurance as such anyway
09:23 even if you are going to invest in mutual funds.
09:25 The real issue is the other types of products that retail investors have typically put their
09:31 money in whether they were entities like Chit Funds or Sahara or the Para Financial Institutions
09:37 in East India, plantation funds, many retail investors who punt in derivatives without
09:44 having any clue as to what they are doing, mostly lambs being brought to slaughter frankly
09:49 in that market.
09:50 So there are a number of other things that investors are doing which I think is where
09:55 the continued flow from into mutual funds will come.
09:59 I am not that worried about insurance per se.
10:01 I understand the arbitrage point which Nilesh was making which is an irritation frankly
10:07 but I think it will get normalized.
10:08 I think usually with a lag we clean these things up and I think our industry will probably
10:14 make enough noise that this will get cleaned up at some point.
10:17 I don't think we will let this persist.
10:19 So that will happen.
10:20 So the flow will come from these other sources.
10:23 Just as it came from real estate and gold in this wave that we have seen so far, it
10:28 will be some of these other sources of current investment in inverted commas which will drive
10:35 mutual fund flows.
10:36 So that's the view I would take.
10:38 We had a speaker yesterday who shared a lot of data and talked about how alpha has been
10:45 contracting in India and that is something that sooner or later investors are going to
10:50 take cognizance of and the fact that if returns have to be factored in and long term wealth
10:56 has to be created then costs have to come down.
11:00 So over a period of time his belief was that the investor will not be willing to pay 2.5%,
11:05 2.2% or even 2% of charges given that alpha is going to be really hard to generate.
11:13 But whenever I talk to industry that's not the belief.
11:16 Kalpen, what's your view because even the regulator seems to be pushing funds to report
11:21 returns basis, you know, TRI now, that is total return index and you've been doing it
11:26 from before the time the regulator sought it.
11:29 So what's your view about alpha in actively managed funds?
11:33 Do you see that continuing?
11:35 So you kept the difficult question for me and I think in everything we mimic the developed
11:45 world, right, the way development of any industry happens and there's no reason why India also
11:50 will not really move into that direction.
11:53 We've had multiple market cycles in the last 20 years and the next 20 years will be no
11:58 different.
11:59 We'll have ups and downs.
12:00 I think already in the last 2-3 years if you see the range of alpha has narrowed down.
12:06 So what it was 5 years back or 10 years back and if you see in the last one year it's narrowing
12:10 down.
12:11 Now we'll have to wait and watch that is it structural or is it just cyclical because
12:17 typically when in every market cycle there's a big move driven by flows, all stocks do
12:22 cycle including cherry picking that fund managers have done.
12:26 So we'll have to wait and watch how that goes but I do, you know, evidence shows that alpha
12:30 has been shrinking.
12:31 There's no denial to that and I would not be too worried because as mutual funds like
12:36 what your Nilesh was mentioning and it'll be wise for us to not position ourselves only
12:41 around alpha and only around equity as an asset class but we are a vehicle which gives
12:47 a window to investors to invest right from a cash fund all the way to international funds.
12:53 So there's a huge range available.
12:55 As long as the absolute returns over cycles are better than other options, we will also
13:02 manufacture products as an industry which will respect the size of alpha.
13:08 So over time passive funds also will grow and the same asset management industry will
13:12 benefit and participate from that.
13:14 So we'll respond to it if things change and like we've seen in every market cycle mutual
13:20 funds have responded very quickly.
13:22 So I would not make too much about it because even today only 4 or 5% investors are invested
13:29 in the industry.
13:31 So penetration levels are too low and the first thing is to bring them to the category
13:36 and not only equity as a category.
13:39 It'll be good to watch that if markets show its true nature of cyclicality, how structural
13:47 are we at that point in time.
13:48 So right now all data points indicate or we hope this is a structural change forever and
13:53 mutual funds remain mainstream.
13:55 But it's always good to remember that good times pass and then bad times also come and
14:01 how do we respond and how do we prepare for that is equally important.
14:05 I think alpha will shrink.
14:07 It's already happening.
14:08 I don't think I need to comment on that or forecast on that.
14:12 Data is showing over the last 2-3 years it's happening and we'll have to respond through
14:18 different styles of products and different price points and even today they are available.
14:23 Various price points are available.
14:25 Cash funds are on 5 and 10 basis points for example.
14:27 How many investors know about it?
14:29 But they serve a very important purpose of giving better alternative to savings account.
14:34 Debt funds are on at fairly low expenses.
14:36 So various options are available to investors even today.
14:40 I think as far as the alpha reducing, I think clearly while we can talk about the entire
14:46 mutual fund, it may not happen in the entire mutual fund industry across all funds at the
14:50 same time.
14:51 You will see the large cap funds where the alpha will disappear sooner than the mid cap.
14:56 I mean that is and clearly I think I feel it's going to, the large cap category is going
15:00 to be challenged by low cost ETFs.
15:02 If you were to look at the data for the last 15 months which is post demonetization till
15:06 now, out of the top 20 funds, large cap funds, 8 out of those are ETFs which was never the
15:10 case.
15:11 So I clearly see, I think the large cap funds will be challenged by low cost ETFs and that's
15:16 going to happen very soon.
15:18 And that's interesting, Nilesh, I'm going to come to you on this one because I see a
15:22 very clear divide between fund houses.
15:24 There are some fund houses like, you know, Sandeep on my left who has been a votary in
15:32 some sense of track of funds or index funds.
15:36 But there are some fund houses, if I'm not wrong, you are one who believes that there
15:39 is still enough headroom to create alpha.
15:43 But Warren Buffett has won the bet that he laid in 2007 saying that ETFs would outperform
15:48 actively managed funds.
15:51 So what do you say?
15:52 Why do you believe or do you believe that ETF is the future or not?
15:56 So I can answer this question in different terms.
16:00 In the most lighter way, I will say Sandeep was referring to Reliance Mutual Fund and
16:03 not to entire mutual fund industry.
16:06 He may think that his fund managers in large cap category will not be able to generate
16:10 alpha.
16:11 At Kotak Mutual Fund, we believe that our fund managers will generate alpha.
16:15 But that's in lighter way.
16:18 The second thing I would also like to take on Mr. Warren Buffett, why has American mutual
16:24 fund industry not able to generate alpha?
16:28 Is it because they lost talent to hedge fund industry and to private equity industry?
16:34 What kind of returns have been generated by KKR, Warburg Finnecas, Bridgewater?
16:41 I mean all those guys have outperformed Warren Buffett by a significant margin.
16:46 So maybe as ETFs wanted to trade at two and three basis point, talent moved to hedge fund
16:52 and private equity funds.
16:54 It didn't remain in mutual fund industry.
16:57 Hence, you couldn't generate performance.
16:59 You pay peanuts, you get monkeys.
17:01 You don't get portfolio managers.
17:05 The third thing, in the Indian context, the fund managers will have to transit from being
17:12 Sunil Gavaskar to Virat Kohli.
17:17 Sunil Gavaskar was facing Malcolm Marshall, Andy Roberts, Michael Holden, Joel Garner
17:24 by wearing a skull cap.
17:26 He didn't need helmet.
17:28 He most probably didn't even have as much protection on his thighs and arms and other
17:35 parts like modern cricketer.
17:37 Virat Kohli today goes equipped with better equipment.
17:41 He wears helmet, he has arm guard, he has thigh guard and he goes and fence against
17:48 Morkel and who knows whatever is there.
17:52 Now both of them are successful cricketer.
17:56 Maybe today's Sunil Gavaskar would have required modern equipments to fight those
18:01 fast bowlers.
18:03 So as fund managers, we haven't yet used modern equipments.
18:09 Today I don't use leverage.
18:11 Give me the power of leverage, I will generate as much alpha as investor needs.
18:16 But obviously I am taking higher risk to generate higher return.
18:21 Give me the power of long and short, I will still generate alpha which an investor needs.
18:25 But I am taking higher risk.
18:28 Give me the power of concentration.
18:30 Today mutual funds have 70-80 stocks.
18:33 I will manage with 20-25 stocks.
18:35 But obviously I will take higher risk to generate higher return.
18:39 Give me the power to invest into offshore, I will generate alpha over there.
18:45 So by using the techniques of leverage, offshore, concentration, long short, I will still justify
18:52 my salary, I will still justify my cost, failing which obviously ETFs can take over.
18:58 So it's a constant battle.
19:00 If fund managers can use modern equipments and transit from Sunil Gavaskar to Virat Kohli,
19:06 they will still go and dominate bowlers.
19:09 If they don't, then they have to retire.
19:12 The mutual fund industry will have to add value to client portfolio.
19:17 It might mean generating higher return with higher risk.
19:21 It will also mean optimizing risk-adjusted return.
19:26 Look at total return index.
19:28 Now index versus mutual fund managers, we provide daily redemption.
19:35 Can you get that in index?
19:36 Answer is no.
19:38 What's the cost of that daily redemption service?
19:41 Is it free?
19:42 No, we have to maintain 5%, 10% cash.
19:46 And you know cash gives lower return than equity.
19:49 Similarly, what is the impact cost in index?
19:52 Globally in many markets when a component changes, a constituent goes out or comes in,
19:58 they calculate impact cost.
20:00 But in India we don't calculate impact cost.
20:03 The index can throw out a company in one day.
20:05 Can I do that in portfolio?
20:07 Can index creators teach me how to do that in one day without creating impact cost?
20:14 I bet none of the index creators will take that challenge.
20:17 It's an open challenge to any index creator.
20:19 Please teach me how to change my portfolio without creating impact cost like you do it
20:24 in index.
20:25 None will come forward.
20:26 I can bet on that.
20:28 The third thing, how many changes happen in indices?
20:32 Globally, the frequency of change is far limited.
20:35 In India, because we are rapidly evolving economy, indexes change much, much faster.
20:41 Now you keep all those things, it's not being counted in fund manager's account.
20:46 And then you say, oh, you know, your performance is not good.
20:50 It's like calculating Rohit Sharma's average only on South African pitch.
20:55 If you do that, he's a mediocre player.
20:57 But when you calculate the way he demolishes opposition on betting friendly pitch, so be
21:02 it.
21:03 He's a great cricketer.
21:05 So it's up to you.
21:06 Do you want to prove Rohit Sharma as a bad cricketer?
21:09 Of course, if you torture data, you can prove that.
21:11 Why Rohit Sharma, even Sachin Tendulkar?
21:14 I can always prove that he's a worse cricketer by torturing data.
21:17 But we know where the fact is.
21:20 Brilliant.
21:21 The theme of this entire conclave for the last two days has been disruption.
21:33 Digitization and how industries are getting transformed because of changing, evolving
21:39 consumer behavior.
21:40 How is digitization impacting the mutual fund industry?
21:45 Kalpen, would you like to go for that one?
21:48 I think the last two, three years have seen a significant shift.
21:51 So we were just tracking data in the last couple of days.
21:55 Almost 60% of transactions are now coming digitally or online and not through physical
22:00 form and paper.
22:02 Now, digital doesn't mean necessarily direct.
22:04 Digital means multiple channels like NSE platform, MFU, MyCams, our websites, broker-enabled,
22:13 tech-enabled transactions.
22:14 So almost 60% transactions are now.
22:17 And we've seen this shift happening only in the last two years.
22:19 So the adoption of digital platform by the industry, by advisors and distributors is
22:24 very quick.
22:25 And in every new technology, India has always shown how, like from landline, we move to
22:30 mobiles much faster.
22:32 So the same trend is being noted here.
22:34 And we're also seeing a lot of new advisors who get empanelled.
22:37 So roughly around 2,000 new advisors come on board.
22:41 For the first time, we see that when they meet us, they tell us that, you know, show
22:44 us all the platforms that you have and which we can use to do transactions for our clients.
22:52 Also in the bull market, you know, the illusion of making investment decisions on our own
22:57 is fairly high.
22:59 So you also see a lot of customers coming directly to websites and transacting.
23:04 So it's a combination of these two things.
23:06 Right now, things look rosy.
23:07 And I think this trend will continue.
23:09 Digital is given in every part of our life now.
23:13 So we will not be immune to that.
23:14 And I think the industry is also doing a lot of work in the digital space, along with our
23:19 advisors to accelerate growth there.
23:22 Mr. Puri, I've been seeing ads while going home.
23:25 UTI Mutual Fund has been inviting people to invest directly on their website, which I
23:30 was quite fascinated and interested in, and the basis that we did a cover, because that
23:35 thought led to a germination of an idea of a larger cover story.
23:39 I would like all of you to respond to this one on basically, is going direct the future?
23:44 Because when I wanted to go out and talk to the fund houses on going direct, some of them
23:49 outright refused for fear of offending their distributors.
23:53 And Sandeep stuck his neck out and talked to me at length on that one.
23:57 Do you think that going direct is another disruptive trend that will happen, or is happening
24:04 already?
24:05 Well, I think you have to keep up with the times.
24:09 One of the channels that is clearly already evident and will continue to develop, and
24:14 particularly as investors, there's a small segment of investors who are self-directed.
24:19 So you have to serve them.
24:21 So you have to respond to the market.
24:24 I don't think the intention is to create the market necessarily, although you could take
24:28 that view as well.
24:29 And I actually think some people will take that view.
24:33 But our position on this is that you can't afford not to respond to the market.
24:39 That's frankly a recipe for going out of business and burying your head in the sand.
24:43 And there's no doubt that one of the trends, not just in India, but around the world, is
24:49 for investors to seek, and particularly self-directed investors, to seek access on technologically
24:56 convenient platforms for a variety of reasons.
24:59 So you have to provide it to them.
25:01 So I wouldn't inject any more emotion or drama into this whole debate.
25:04 It's not about us versus them, X versus Y, X fund house supporting a group of IFAs and
25:14 Y fund house undermining them.
25:16 This is all nonsense.
25:17 I think that's a huge distraction.
25:20 I think we're all interested in fundamentally developing omni-channel strategies.
25:24 At different points in time, you tend to emphasize one, depending on where you are as a fund
25:30 house, depending on your target segment.
25:32 So this is a little bit of a false dilemma.
25:35 Everybody is going to have some form of ability to service self-directed customers.
25:41 And they will seek to come direct.
25:42 There's no more emotion in that.
25:45 But since Nilesh woke up on this point of alpha and had a little go at Sandeep and so
25:49 on, I feel I must pick up on his and the same spirit.
25:54 Yes, you must.
25:55 I think he's speaking to a convention of fund managers.
25:59 Obviously, his views on this will be popular.
26:01 But I will take an opposing risk here, because I think there were a number of fallacies in
26:06 his otherwise very engaging description.
26:10 And let me just lay them out in the interest of, frankly, just establishing some facts.
26:16 Alpha is very hard to come by.
26:18 I don't think we need to pretend that alpha is a birthright or that we are all going to
26:22 be able to generate it.
26:25 Fallacy number one is, of course, that alpha has to be generated based on a certain mandate,
26:32 which includes a risk adjustment.
26:34 If I'm generating my returns by taking more risk, more concentration, et cetera, I'm actually
26:40 not generating alpha.
26:42 So many of Nilesh's examples of the ways in which fund managers generate so-called alpha
26:48 is actually not alpha.
26:50 It's better returns, but it's better returns for materially higher risk that are being
26:54 taken with all those strategies.
26:56 And the real truth, which all of us understand, is that much of the so-called alpha that was
27:01 generated in the Indian asset management industry-- and this is not a point scoring issue, I think
27:07 we all understand that-- was based on a misalignment of mandate, a misalignment of risk, and therefore
27:13 comparing ourselves to indices which, frankly, were not relevant.
27:18 Some of that is being corrected now by the notion of true to mandate, true to label.
27:24 And as you get into an environment where you actually have to outperform relative to risk
27:30 taken, that, I think, will raise the bar.
27:33 You're still going to have alpha, but a lot of people are going to start dropping off.
27:37 And to compare Warren Buffett to a KKR-- I'm sure KKR-- by the way, I'm not sure KKR has
27:43 consistently over all periods of time outperformed Buffett, because there are many arguments
27:48 that say private equity.
27:49 I know when we did analysis on private equity in India, on average, the average private
27:54 equity return in India was actually below the index for a long period of time.
28:01 So it gives you an indication.
28:02 Of course, the best performers would have been much above and the worst much below.
28:06 But given that they were taking much more risk, that was clearly a very poor outcome.
28:11 And generally, you take much more risk as private equity, because you're taking duration
28:14 risk, you're taking liquidity risk.
28:16 So the two things are not comparable.
28:19 So I think we have to be respectful of the fact that alpha is extraordinarily difficult.
28:25 Costs are going to be a huge issue, therefore, for investors.
28:29 It is well established.
28:31 All of us know that the compounded effect of paying 150 or 250 basis points year on
28:37 year more than an index fund is a tough act for us to beat.
28:42 So we're really going to have to look at where we think we can generate alpha.
28:46 I think most of us are already doing that.
28:48 Which strategies can deliver that?
28:50 Revisit our investment processes.
28:53 And yes, we'll have to prove again, and I think we will prove again, that as an industry,
28:57 we can generate true alpha, which I honestly don't think we've had to do yet.
29:04 And I think it's a positive development that you'll see a large number of funds who found
29:09 it very easy, actually.
29:11 All of us, don't put ourselves out of that, found it very easy to generate alpha.
29:16 Because you look at your own table and you'd say, funds outperforming benchmark, I mean,
29:21 that's almost a given in this country.
29:24 You were expected.
29:25 Funds outperforming peers was a whole different issue.
29:28 But funds outperforming benchmark, this country was fabulous.
29:32 I mean, we took that for granted.
29:34 We're all walking on water.
29:36 And I don't think that was very helpful, frankly.
29:39 So I think we're moving into a better environment, better measurement of alpha.
29:44 In that context, of course, index funds will play a role.
29:47 Of course they will, whether for large cap or for other things.
29:50 But I don't think they're going to replace the ability of really good fund houses with
29:56 really good investment process, of which we have plenty in India, fortunately, to continue
30:01 to generate alpha.
30:02 So I think that's a more balanced perspective.
30:04 I don't think we need to beat our chest too much.
30:07 I think we should be a little humble about how difficult it's going to be to generate
30:11 true alpha.
30:13 But I still think we're going to be able to do it.
30:15 Maybe many fewer of us will do it.
30:18 So we'll separate the men from the boys.
30:20 That's going to happen for sure.
30:23 I don't know whether that will shrink the pool of investment managers in this country,
30:28 because as you shift towards passive, you need fewer investment managers.
30:32 Maybe there's a Darwinian element to this.
30:34 It will expose mediocrity.
30:36 It will expose the permanent laggards.
30:39 And I think that's a good thing.
30:40 As a CEO, it might bring my cost base down over time, because I have to support less
30:44 mediocrity in the investment function.
30:47 So many benefits as this process happens.
30:50 So I think the investors should certainly be cheered by what's coming up ahead of them.
30:55 Sandeep, you want to go next on this whole issue of cost and innovations, digitization,
31:02 consumers wanting to go direct, the desire to bring costs down, because it does have
31:07 an impact on wealth creation over a long period of time.
31:10 How would you, because you directly connect with your consumers, investors, I know that.
31:15 So when they write in to you asking these questions, how do you respond to this?
31:18 No, I think I would like to put it this way.
31:20 The cost will have to come down.
31:22 I think we can't live in this fallacy.
31:24 The same cost can continue.
31:26 I mean, if you were to look at, at this point of time, a fund which is less than 500 crores
31:31 or 700 crores, charges up to 300 basis points, I think it's not going to be possible going
31:35 forward.
31:36 So that is one.
31:37 Because of which it becomes important, if you're talking of cost coming down, digitization
31:41 is very important.
31:42 It's going to take away a lot of inefficiency from the system.
31:45 And I think one of the things that Kalpen said, digital does not mean direct.
31:49 I think there are so many things which need to be done digital.
31:51 So maybe a part of, again, the earlier discussion of alpha and this, you know, while we believe
31:57 it's not a binary thing, alpha will be there or not, it's going to, both will coexist.
32:01 But the point is, a certain part of fund management will also be replaced by machines.
32:05 I think we can't ignore that.
32:07 That's also talking, we are talking of digitalization.
32:10 One of the highest costs, I mean, for all of us in the industry was basically trying,
32:14 the cost of reaching out to people in Bharat, in small citizen towns, that again is going
32:19 to come down because of the digitalization.
32:22 We are seeing for us, a lot of new investors are coming through the digital properties,
32:26 whether our own or through distributors.
32:28 So that's again, so digital is, I think you can't turn a blind eye to digital.
32:33 And I link this issue of digital and cost hand in hand.
32:36 Digital is going to get the cost down and we will have to pass on this cost to the investors.
32:41 I mean, when I say cost, it's all the reverse of that is, by reducing the cost, enhance
32:46 returns to the investors.
32:48 I mean, that has to be, you know, I mean, we need to all factor in.
32:50 I'm factoring in for my next five years business plan that the cost will come down.
32:55 So I think at no point of time I can keep thinking the same high cost will continue.
32:59 Your other question, should the investors go direct?
33:02 I clearly believe from a long-term point of view, I think anybody who knows the stock
33:07 market very well, knows how to invest.
33:09 He doesn't even have to come to mutual funds.
33:11 If he knows everything, he can go directly.
33:13 Similarly, if any, there will be investors who will become mature.
33:17 Some of them might go direct, start investing directly.
33:23 But still, there is a major population in India which will need the assistance, help,
33:28 guidance and education of a distributor because directly investing has its own risk.
33:33 I mean, just to give you a number, I mean, if you were to look at the funds which were
33:37 existing for more than 22 years, again, without taking the name of the fund, the
33:42 funds which started in 1995, if an investor had invested in the top two funds in India
33:47 which started in 1995, one lakh rupees became 1.2 crore rupees and the bottom two,
33:54 if you had invested, one lakh rupees became 11 lakh rupees.
33:57 Now look at the cost of going direct.
33:59 So I think investors who are mature think they know everything and really know.
34:04 See, thinking that I know everything and really knowing it, I mean, they are two
34:08 different things.
34:09 If he is educated, he thinks he can do it, he can go direct.
34:13 But I still believe there will be a very high percentage of Indians who will need that
34:17 assistance.
34:18 And I'll keep, you know, I mean, in the last interaction, what I said, I think I'll
34:21 again quote that.
34:22 We have all been, you know, I think in India, we've been talking about what is the
34:27 impact of mis-selling.
34:28 There is also something called, we need to analyze the impact, what can be the impact
34:32 of wrong buying.
34:33 If you're not aware of what you're buying.
34:35 So again, that is exactly the point I said, 1995 funds, somebody one lakh became 1.2 crores,
34:41 the other one became 11 lakh rupees.
34:43 I mean, I'm sure going through a distributor, he might have paid that 100 basis point extra,
34:47 or I think typically 80 basis point is the difference between a direct plan.
34:51 But when you see 1.1 lakh crore rupees is the difference in the absolute amount, I think
34:56 he might think it's not worth it.
34:57 So I think I'll say, we need to, again, I think I agree with what Leo said.
35:02 There are few realities I think we have to live with.
35:04 I think we cannot always keep thinking that it will not happen.
35:08 Certain as right now there's 2% of the population, we need to be prepared that the top 5% might
35:13 keep moving direct.
35:14 But the beauty is, the base is getting bigger.
35:17 I mean, today, I mean, more people are going to come into the mutual fund industry, and
35:20 they are going to keep requiring the assistance of the distributors.
35:22 So both will coexist.
35:23 I think not to dramatize it, saying the entire industry will go direct tomorrow morning after
35:28 this conclave.
35:29 No, it won't.
35:30 But the regulator definitely seems to be very concerned about distribution.
35:34 So it's trying its best to separate distribution from advisory.
35:38 And this whole trust deficit that exists in the minds of the investors.
35:44 So how do you view that?
35:45 How do you view that, Nilesh?
35:46 This whole regulators move to separate advisory from distribution.
35:50 How is that going to play out?
35:52 And will it impact your penetration levels?
35:56 Because in India, nobody wants to pay for any advisory, at least.
36:00 That's the impression I get.
36:01 Including, you know, I was talking to Lakshmi, your colleague, and she said, you know, a
36:05 friend from the US comes and keeps asking for free advice.
36:08 And she said, I'll do it once and I won't do it another time.
36:10 But he still doesn't want to pay for advice.
36:12 So how do you think this regulation is going to play out?
36:16 So at the principal level, the differences between should a distributor who is representing
36:26 manufacturer give advice, because he'll probably end up selling that product which gives him
36:33 highest compensation.
36:36 On the other hand, advisor who represents customer, hopefully won't give wrong advice
36:42 because he's not going to get anything from manufacturer.
36:45 Those are the two principles.
36:48 But in real life, can a distributor sell a product without giving advice?
36:54 Or can an advisor continue to serve customer without charging appropriate fees?
37:02 The experience in United Kingdom where this concept was introduced with a lot of fanfare,
37:08 and their own regulator after introducing that concept and reviewing it later on has
37:13 come to the conclusion that by bringing that regulation, they have deprived people of good
37:20 advisory or good distribution.
37:23 The distributors and advisors have focused more on the HNIs, but the bulk of the bottom
37:31 of the pyramid in United Kingdom has been deprived of financial knowledge, financial
37:37 inclusion and financial services.
37:40 So we need to ensure that there are enough checks and balances so that distributor does
37:47 not end up selling that product which gives him maximum compensation, but does take into
37:53 account customer's interest.
37:55 And at the same time, an advisor is encouraged in an environment where he can charge fees
38:03 for his services rendered.
38:06 In the professional field, we have seen doctors, lawyers, chartered accountants getting fees
38:11 for the advices rendered or for the services rendered.
38:16 The same thing will one day work out for advisors provided they reach the same professional
38:21 standards of a doctor, of a chartered accountant or of a lawyer.
38:25 And in the meantime, till such time we reach that platform, we will have to ensure that
38:30 there is co-existence of distribution and advisory model with appropriate checks and
38:38 balances.
38:39 Kalpen, do you want to go for this one?
38:40 How do you view the separation of advisory versus distribution?
38:42 I think SEBI has been trying to do this for the last couple of years and every time a
38:48 new document gets circulated, it does not really capture a lot of fundamental ground
38:53 realities.
38:54 And I agree with what Nilesh said.
38:56 There is room for both actually.
38:57 Both will evolve over time but the practical difference of an advisor only giving advice
39:03 and then not saying which one should you buy and vice versa, a distributor just selling
39:08 a product without giving the right advice and making a financial plan.
39:12 Those are very practical realities that I think have to be thought through further.
39:16 There are a lot of confusing, you know, conflicting ideas like from a family, two brothers can't
39:23 be in the same business.
39:25 So the whole framework has to be revisited on a more practical basis and I think there
39:29 is still some time before we reach there.
39:31 And I will just add to the earlier question that you were saying.
39:34 I always, you know, keep this in mind that the fixed deposit base of 100 lakh crores
39:39 is all direct plan, right?
39:42 So investors have gone there for a 5% return after tax and that's the huge pie which is
39:49 lying there and our industry actually is oscillating right now between two extremes.
39:53 There are ETFs at 3 basis points and there are equity funds at 300 basis points.
39:58 There is huge room for volume and margin both somewhere in between if collectively we moderate
40:06 our greed, we as manufacturers, partly advisors and even investors because in trying to go
40:11 for a 3 basis point product, you could lose out on 2-3% half hour time or miss buy or
40:17 in selling a 3% product and asking for that type of pool, we will kill the returns of
40:22 our product.
40:23 There are fixed income funds even today at 1.8% to 2% fees when interest rates are only
40:29 at 7%.
40:30 These fees were relevant when interest rates were 16% 20 years back.
40:34 So the fees have not changed.
40:35 I think there is a lot of room to moderate and see how the pie can be expanded and the
40:41 pie should be expanded not when times are only bullish like right now but even when
40:45 things turn bad.
40:46 You know this has been the most animated audience I have seen in the last two days in this particular
40:52 session.
40:53 So I will basically quickly throw this, take questions from the audience if there are any
41:00 before we conclude this session.
41:02 Are there questions from the audience?
41:04 We talked about the alpha going down.
41:13 So I want to know what are the reasons for alpha going down.
41:16 Is it more transparency in the Indian market, more corporate disclosure or anything else?
41:27 It's actually not alpha going down, it's about how you measure alpha.
41:31 All that's happening in the Indian market is a change in the way that we are going to
41:35 measure alpha.
41:37 So as I think was explained, on the one hand of course we are going to take total returns,
41:41 which means we will actually have to take into account dividends paid, so not just price
41:46 return.
41:47 And the second is the clarity around mandates, which to some extent means if you are going
41:51 to outperform a benchmark, it needs to be the right benchmark that you outperform.
41:57 And you don't for example run a strategy which has 80% or 60% mid cap and 40% large cap and
42:04 then benchmark it against what is essentially a large cap index and say you have generated
42:09 alpha because obviously in the former fund, which is 60% mid cap, you have taken a lot
42:15 more risk.
42:16 At certain points in the cycle that will have generated a lot of return.
42:20 That return is not alpha and should not be classified as alpha.
42:23 It's simply return based on additional risk, which is fine if you have knowingly taken
42:29 it but not fine if you have unknowingly taken it.
42:33 So really what we are talking about is a shift in the way we measure alpha.
42:36 Alpha is not going down or up.
42:38 Alpha has always been what it is.
42:40 We are just going to measure it differently, which means you will see perhaps fewer fund
42:45 managers being able to generate alpha and as I said earlier, that's a good thing.
42:50 There should be a high bar for generating alpha.
42:52 We will take these two questions.
42:56 The lady here and the gentleman over there.
43:01 My question to all the panelists, when we are saying that normalization of scheme, that
43:08 large cap fund should be large cap and mid cap fund should be mid cap, I am just trying
43:13 to understand from all the panelists, is it much before the time for the regulator to
43:19 have insisted on this product to be large cap oriented, should have large cap fund only?
43:26 Because I am saying when you look at the standard deviation or the risk measurement ratios,
43:33 there is not much difference in terms of those numbers but the returns are too good.
43:40 Why am I saying because market is not mature.
43:43 Sandeep Sikka said 2% penetration of mutual fund, I am saying let's say 4%.
43:48 So when we have not reached there, why do we talk about such things where let's have
43:54 a cleansed market and cleansed product suit.
43:58 All of you please may answer.
44:00 Let me ask this question to you.
44:04 Are you vegetarian or non-vegetarian?
44:07 Both.
44:08 Both, that's very unusual, hybrid funds.
44:12 I think this whole drive towards true to label is important.
44:18 Achchi cheez ke liye being early or late ka concept nahi hona chahiye.
44:22 If you are doing something right and something good, that concept of being too early in my
44:25 view is irrelevant and if we are able to tell an investor this is a fund which is a large
44:32 cap, see you have diversified funds where you can buy across the entire spectrum of
44:36 500 stocks and cherry pick out of that.
44:39 That allows you to express your view and mix market caps.
44:44 But if I give you a fund where I say I am a large cap fund but I buy 35% in mid caps
44:50 and micro caps and small caps and then give that excess return and compare myself to Sensex
44:57 or Nifty, that's a very unfair comparison.
45:00 In fact it's not even transparent and it will hurt the credibility of the industry.
45:05 So the timing to my mind is absolutely right because we are setting the foundation to be
45:11 a very responsible asset management industry.
45:15 Lots and lots of investors are coming in.
45:16 In last 18 months or last two years as much money has been collected as much we had in
45:22 our lifetime over the last 45 years.
45:25 So when these turning points are being visible, there is no harm in putting in place the right
45:31 mechanisms which help investors choose right, which help advisors also compare the right
45:36 funds with each other.
45:38 And I have heard this enough time that you know is it too early, is it too late.
45:43 I repeat again that steps which are logical, legitimate and in the interest of investors
45:50 are never too early.
45:51 I think we should welcome any decision like that.
45:54 The lady there, please, that's the last question.
46:00 Thanks.
46:01 Hello, good afternoon.
46:02 Yes, I mean given the present volatility and the increased cost and the tax burden that
46:08 has been imposed, I'm not really thinking in terms of alpha.
46:11 I'm just thinking in terms of protecting my portfolio until you navigate this mid-air
46:16 turbulence.
46:17 Now how would you, what would you do to just, to save your, to keep your NAV in check and
46:24 to protect your portfolio, what would you do?
46:27 I'd like to answer that, look back at evidence, the most expensive day of investing in equity
46:35 mutual funds in the last 20 years was perhaps some day in Jan 2008.
46:41 Because that's when markets were at some 27, 28 times valuation and you know we are somewhere
46:47 there again or slightly less than that.
46:49 Since then to now, the average return of the benchmark has been around 6 to 7% and in this
46:54 journey over 10 years, so 10 year return is somewhere around 6 to 7% and there were lots
46:58 of ups and downs in between.
47:00 In the same period, mutual funds delivered between 9% to 12%, so the better funds delivered
47:05 12, the average funds delivered between 7 to 8, so there was some alpha in this whole
47:09 cycle, partly optical, partly genuine.
47:12 But in the same period, SIPs delivered around 14 to 16% CAGR return, tax free.
47:18 So point to point, you started on the worst day and you track back, the market return
47:24 was less than fixed deposits but an SIP return was higher.
47:27 If you had done an asset allocation fund, the returns were 12% tax free.
47:31 Now interestingly in this last two years, a lot of money has come via SIPs, which means
47:38 volatility should be welcomed.
47:40 These investors will do well if there is volatility, they will not do well if there is no volatility.
47:45 So we hope that there is volatility and investors just give time and live through it.
47:50 Second, a large chunk of money has also come in active asset allocation funds, apart from
47:55 balance funds and other hybrid funds like equity savings and like so.
48:00 Almost 50% of flows have come in hybrid products, where half the portfolio is in fixed income.
48:04 So the risk of volatility or the impact of vol is cut down.
48:09 So I think that's a big sign of shift than what we had in the last cycle and that's a
48:15 very heartening trend and increasing incrementally also if investors who are afraid of volatility
48:20 and cannot give that type of time horizon, there are series of such smart hybrid products
48:26 that can be looked at.
48:27 So mutual fund is not only 100% equity as an option, there are multiple risk return
48:33 payoffs available for investors who want different degrees of volatility and protection against
48:40 that.
48:41 Thank you.
48:42 On that note, I'd like to thank all the panelists here.
48:45 Thank you very much for being here.
48:46 We are now going to the most exciting part of the evening, which is the awards.
48:50 Thank you very much.
48:51 Thank you.
48:51 Thank you.
48:52 [BLANK_AUDIO]