• The private sector mutual funds are celebrating 25 years this month. How do you see the last quarter century?
Indian mutual fund industry has come a long way in establishing itself as one of the most reputed financial market intermediary in the last 25 years. Since 1994, the market got evolved seeing multiple cycles of different kind. Industry moved away from local to global, integrating with global financial markets gradually. Regulatory environment kept pace with the growing size of the industry and got evolved continuously through learning along the way. Mutual fund industry has kept up the reputation of being the caretaker of a large pool of investors’ money with least damage and best possible benefits to its investors.
• When did you start your journey in the mutual fund space? Please tell us a little more about your personal journey?
In fact, I joined the mutual fund industry when there were only public sector players, way back in 1992. Unit Trust of India was the Godfather of Indian stock market. As the private sector mutual funds began to come up post formation of the first mutual fund regulator during early part of 1990s, after much hesitation I moved from public sector mutual funds to private sector mutual fund, to the then called Birla Capital International in the year 1994. I joined as a trader in money market and in equity. Deep learning while dealing in securities with various market players, helped in getting a strong foothold in the early part of my career.
As a trader, gathering intelligence and getting the best negotiation for every transaction were considered to be the most important jobs apart from managing money. Over time, this experience paved way towards managing money both in fixed income and equity over time. It was not that easy given the fact information availability was in short supply. Our dependencies for information were only on PTI screen through ticker movements. Since then it has been an interesting journey working maximum number of hours each day with limited staff strength and lots of work to do. Having been part of the same mutual fund since 1994, every three years, my growth happened moving up in rank including as Chief There is an interesting coincidence, I became the CEO on the day entry load was removed post Lehman Bros. crisis!
• You were well known as a great debt fund manager. How do you see the progress of debt funds in the last 25 years?
My heart used to lie more towards fixed income funds as debt market players used to function independent of market players or brokers unlike equity. As a fixed income manager, all the research work and assessment of the emerging trend both in macro and micro have to be done by one’s own self. On the basis of individual money management assessment, I used to trade in the bond market, both in managing duration (through government and public sector bonds) and credit risk.
During early part of the years, there was no concept of credit analysts. I used to wear multiple caps as I had to be the jack of all trades. Debt funds have got evolved in creating a space for itself among investors across the country, competing with established fixed coupon offering bonds and fixed deposit. Mutual funds also played a very important role in not only making Indian debt market more liquid, it also helped in establishing trust worthy bond yield curve across different segments of the market. In fact, mutual funds have played the key role of an effective intermediary in the dissemination of rates in both up cycle and down cycle.
At times, I say, money market yield curve got established in India only due to the presence of debt funds, especially money market and liquid funds. I take pride in this area as mutual funds have been the players for investing in money market instruments such as CP and CDs issued by corporates and banks.
• Incidentally, Birla is credited with introducing debt funds in the country. Were you part of Birla at that time? What are the significant innovations in this space?
Yes, I have been part of the AMC since the time we launched our first equity funds. That is, Birla Advantage Fund and Birla Income Plus, our first debt fund. Selling a debt fund was not that easy those days given the issuance of bonds at very high coupon rates, in excess of 17 per cent. Our first pitch was the taxation benefit arising on account of indexation benefit. To be frank, we were the first mutual fund to make a pitch on these lines to investors to consider investing in debt funds.
As the time progressed, we discovered the need to establish liquid funds akin to money market funds. The only difference in liquid fund was to invest bonds of less than one year with daily liquidity unlike money market funds which used to invest only in CPs, CDs, and treasury bills. Daily put/call debentures not only helped in managing the liquidity needs of the portfolio, we could also avoid potential market fluctuation in the portfolio. We as a mutual fund were the initial few to trade in government bonds, invest in both Securitised debt papers and floating rates instrument. In fact, among the mutual funds, we were the first one to convert fixed coupon bond to a floater rate coupon using interest rate derivatives linked to MIBOR.
• There have been many changes in mutual fund regulations in the last decade. Though it ensures transparency, investors believe things are always changing. As AMFI chairman, how do you see it?
During my entire journey in mutual funds, one thing had remained constant; it is the regulatory change, apart from learning to live in VUCA- (Volatility, Uncertainty, Complexity, and Ambiguity) world. It was imperative that the money managers’ practices be challenged in the form of a better regulation. At times, I do say that regulation got evolved upon seeing market practices apart from the outcome for investors. In fact, the industry actions remained responsible for regulatory changes. I would assume even going forward regulatory frame work will remain vigilant to the ultimate beneficiary interest – that is, the investors, and also any systemic and reputational risk to the Indian capital market. As long as mutual fund practices and capital market integrity remains intact, one need not worry about regulatory changes. If it is compromised, then regulatory changes are bound to be there, given the fact our capital market regulator is the most respected regulator in the world.
• Mutual fund distributors, especially the smaller ones, are staring at a bleak future. The commission structure is not rewarding enough. What is the solution to this?
Mutual Fund distributors irrespective of the size will play an important role in the Indian capital market. As the customer wallet size becomes bigger, more need will come for taking advice from distributors or someone who knows the financial solutions. Therefore, there is absolutely no reason why one should worry about their existence. However, it is important to have the right business model in targeting the right set of customers, right set of service standards and high focus in building scale. Falling commission rates can only get compensated through high volume growth and value growth. Building scale in creating a successful business model will be key, given the fact that the mutual fund industry as a percentage of banking industry will become really large in the coming years. Currently, it is at 21 per cent, and can go up manifold in the years to come.
• There is an influx of new investors, especially in direct schemes, in the last couple of years. The industry seems to be very happy with increasing SIPs but not bothered about guiding and managing the expectations of these investors. Please comment.
Fortunately, in the last few years, educating investors have become the integral part of Indian mutual fund industry. The time and energy that is going behind creating awareness at every market cycle about mutual fund investors have now become the new normal. In fact, it is gaining more and more attention of our fund house which ranks number one, as suggested by a recent survey. Communication about long term investing through mutual funds also has become one of the key trends while communicating with investors directly as well as through distributors. Promoting SIP is one way of removing ongoing tension during volatile period and help investors build portfolio through SIP for long term benefit. This will remain as one of the powerful tools for building mutual fund portfolio. Given the established long-term track record in managing fixed income portfolio, as we move forward, we believe fixed deposit investors would start to look at fixed income mutual fund schemes to get better tax adjusted return.