What do you think is the biggest trial for the mutual fund industry?
The biggest challenge today is to find ways to take mutual funds to the masses. This would be the key to an exponential growth for the industry. Distribution plays an important role in ensuring that mutual funds reach the people. Several competing products have cost structures that allow for significant expenses for taking them to the masses. Mutual funds, on the other hand, work on wafer-thin margins and it is a problem to find resources to service investor education and ensure wider availability.
Are you referring to insurance products, where the commission structure is a big incentive for the distributor?
If any product has achieved depth in the market, it is because its economics ensure its penetration. The distributor earns a good commission by selling an insurance policy. Moreover, there is an assurance of income for 10-15 years from the trail commission. In mutual funds, the upfront commission is no longer attractive and there is no assurance of trail commission because an investor can exit at any time. In fact, many fund distributors are thinking of folding up their businesses.
Has the removal of entry loads helped investors?
Every change invites a set of detractors. If you look closely, all recent regulatory measures are loaded in favour of investors. If it helps them, it will broaden the investor base for mutual funds. In the long run, these changes will have a positive impact on the industry.
To benefit from the removal of entry loads, investors must approach a fund house directly. However, given that investor education and awareness are low, it is often difficult for people to fully understand the various schemes available and identify the best fund to invest in. Most investors do not have the wherewithal to pick the best product in the market and need professional help.
Given that distributors no longer have an incentive, will Pramerica offer facilities to invest online?
Yes, we will offer online investing facilities, but being online or not isn't the issue. An investor just needs to make a call and the distributor will come to him. Product acceptability is a bigger challenge than finding different modes of investing.
According to a recent survey, less than 10 per cent of the annual household income is invested in mutual funds. Why is retail participation so low?
The low awareness about mutual funds, lack of investor education and limited reach of mutual funds in smaller towns and cities are some of the reasons that are affecting participation from retail investors. Today, mutual funds are the cheapest, most regulated and transparent investment vehicle for an investor. With this message gaining momentum in the investor community, we will see a substantial movement in favour of mutual funds. The companies, in turn, will have to invest in infrastructure and technology to increase the reach and build investor confidence.
Since you are a new entrant in an overcrowded market, what will be your USP?
We will offer innovative products that help investors preserve their wealth and help it grow. In addition to the products, we will reach out to retail investors and bring them meaningful solutions. There is a substantial gap between their aspirations and the financial situation they find themselves in. We will help them bridge the gap between their current financial status and aspirations by providing suitable solutions.
Will you focus on new investors or try to wean away the existing ones from other mutual funds?
Our focus will be on expanding the investor base. The total population of potential investors is a huge multiple of the existing base and there are enough investors for all fund houses.
Do you think the Indian markets will be sucked into the vortex of European economies? What are the chances that the markets might slide back to the 2008 levels?
Though the Indian economy is relatively insulated from the international situation, global liquidity flows are interconnected. If the European situation worsens and there is a full-blown crisis of confidence, it will affect the Indian markets too. However, the leverage levels in the world are very low compared with those in 2008, and given that most governments are proactively working to avert such a crisis, the chances of this happening are very less. We also believe that any drop would be temporary. If the markets fall dramatically, they are also expected to rise at the same pace.
The banking, financial services and insurance (BFSI) sector accounts for almost 20 per cent of the assets invested in equities by mutual funds. Do you think this is too high an exposure for an individual sector?
India is a capital-starved country. For the India growth story to continue at a rate of 9 per cent, increased savings and investment in the economy will have to play a pivotal role. The BFSI sector is critical in ensuring that savings are channelled to fuel this growth. Given this fact, the 20 per cent weightage to the sector is not too high. Even in other markets, such as Singapore, Hong Kong and Australia, financial services form a major portion of the assets.
Where do you see the markets headed over the next 12 months? Which sectors are likely to outperform and which ones will lag?
Over the past few weeks, there seems to have been a high level of uncertainty in the global markets, which is leading to some risk aversion. Depending on how the global macro situation pans out, we could see volatility in the Indian markets in the near term. However, given the structural strength of the economy and strong corporate performance, we expect the markets to move up in the long term. In terms of sectors, we believe the healthcare, infrastructure, financial services and domestic consumption sectors will outperform. Global commodities, telecom and real estate could underperform till there is macro clarity.
The passively managed index funds and exchange traded funds, which have low expense ratios, are becoming increasingly popular in India. Why?
In our country, actively managed funds have done much better than the passively managed index funds. An investment in an index fund would have witnessed the same amount of volatility as in an actively managed fund, but its returns would have been far lower. In the past one year (as of 21 May), the ELSS category has given returns of 31.12 per cent, the BSE Sensex has offered 18.47 per cent, and the index fund category has given only 16.03 per cent. As of today, the case for passive investing does not exist in India.
