Franklin Templeton Asset Management (India) President Harshendu Bindal talks about the mutual fund industry and how it has changed in the past 20 years -Q. As the fund house that took over the first private sector mutual fund (Kothari Pioneer) in India, what was it like to enter the Indian market?A. Franklin Templeton set up (Indian) operations in 1995, much before the 'India story' was popular. This was based on conviction about the long-term potential of the Indian economy. The initial years were focused on sharing global practices, participating in the development of the industry and increasing awareness. In 2002, we acquired Pioneer ITI, to create an organisation with investment experience in market cycles, a comprehensive product portfolio and presence across the country.
Q. The Indian mutual fund industry has come a long way in the past 20 years. What have been the major achievements and setbacks?A. The key
achievements are wealth creation (some funds have delivered over 23% CAGR), product innovation, high levels of transparency, disclosure and investor awareness, and significant increase in distribution reach, especially in big cities. But, there is still a long way to go.
The challenges have been the lack of reach beyond big cities. Also, the funds do not have access to long-term savings pools, such as pension and insurance, and there is heightened focus on gathering assets.
Q. What are the regulatory changes in the past 20 years that have changed the mutual fund industry?A. The changes have ensured that the
industry maintains transparency and disclosure norms. No other product publishes such complete information. There have been changes in product regulation as well. For example, the funds used to value debt based on the management's own interpretation. This has been standardised by the Securities and Exchange Board of India. Also, 2 bps (a basis point is 1/100 of a percentage point) daily net assets are set aside for an investor education fund, which will create a large corpus for the purpose.
Q. Has cost of funds come down over the years and is it discernible to the investor?A. Starting from the ban on entry load to introduction of direct plans, there has been a steady fall in overall expenses. In the 90s, for instance, some funds were charging entry loads up to 6%.
Q. Do you think interests of fund manager, investors and distributors are aligned?A. In a free market economy, manufacturers and distributors have to
focus on retaining clients and getting new clients. This can only happen if the focus is on the clients' interests. While potential mis-selling can't be wished away, it can be addressed with regulations, awareness and communication.
Q. How will the proposal for introducing a new category of distributors (retired employees for example) bring small-town investors to mutual funds?A. It is still too early to gauge the impact. While the intention is positive and could help expand the distribution community, there has not been a strong interest in terms of registrations. We expect this to change. This segment is likely to become important in reaching customers who don't have access to mutual funds.
Q. Fund assets in equities have been on the decline or stagnant. Has investing in equity faced a major setback in India after the market collapse in 2008?A. Investors
got into equity funds during the bull phase, until 2007, with heightened expectations. The fall in 2008 and increased market volatility after that has slowed inflows into equity. Also, global news flow has been negative, and this weighs on investor sentiment.
In the 90s, domestic investors were key drivers but not anymore. There is huge FII (foreign institutional investor) participation. Corporate governance standards have improved. So, fund managers have a lot more options to invest and the number of products has increased. Today, the biggest problem is that investors do not get exposure to mutual funds through retirement accounts since they don't have open access to pension and insurance. Allowing investors to choose underlying asset classes and funds will be the game changer.
Q. How will Indian markets perform over the next three years and which sectors will thrive?A. The long-term outlook remains positive. Valuations of key indices are close to long-term averages of 14-15x one-year forward P/E ratio, and various segments of the market are undervalued. From a long-term perspective, we are positive on domestic demand, consumption and investment. The financial services space is also poised to grow, given low penetration of banking and financial services in the country.
Q. What is your view on interest rates?A. Given the economic situation, there is a case for further rate cuts. However, issues such as fiscal deficit, current account deficit and inflation will slow the pace of the cuts. Instead of trying to time interest rate cycles, investors should follow an asset allocation process.
