Nilesh Sathe, CEO of LIC Nomura Mutual Fund, tells Dipak Mondal of Money Today how he plans to turn around the fortunes of the fund house, which has disappointed with returns and is ranked 24th on the basis of assets under management.
In April 2009, LIC Nomura Mutual Fund was managing Rs 26,000 crore. Today, it's a Rs 5,000-crore fund. What went wrong and what are you doing to improve the situation?
After I took charge in April 2012, a few things I observed was that our mutual fund entity was not working on professional lines, returns were not competitive and ranking in terms of assets under management (AUM) was below 20.
We took stock of things to find out how we can bring it to the top 10-15, because with a respectable name like LIC associated with it, it cannot afford to be at the 20-25 position.
First, we decided that it has to be professionally managed.
Professionally-run means we have to pay market salaries as we cannot expect good professionals to join us at government-level salaries. We got board approval for that. Then we started looking at engaging fund managers from the industry. We recruited three fund managers with vast industry experience.
Second, we focused on fund performance. Investors may come to us because of the LIC brand name but won't stay with us unless we give them market-linked returns, which was not happening earlier. The reason was we were absolutely conservative in our fund management approach with focus only on safety. I told my fund managers that I did not want a single rupee to be unutilised and all the money we collect had to be invested. So, I gave them the mandate to remain fully invested.
I also told them I won't interfere in their day-to-day functioning, but I wanted results. Since I gave them freedom, performances have improved. In the past six months to one year, most of our equity funds have given above-benchmark returns.
What steps have you taken to increase the AUM?
If we want to increase the AUM, we need corporate clients. Corporate clients track returns on a daily basis and so we have to improve our performance. I am personally meeting institutional investors to give them confidence about our fund management.
The efforts are paying off. Institutional investments have of late crossed Rs 4,000 crore from less than Rs 2,000 crore.
Another key to improving the AUM is attracting 'sticky' funds, that is, money which remains invested for long. This money does not come from corporate investors but from retail investors. So, the question we faced was, how to attract retail investments?
We had a unique product called unit-linked insurance scheme (ULIS). It has debt, equity, insurance, plus accident cover and tax benefits. We have modified the product by adding top-up features and are promoting it aggressively. It has a lock-in of three years. It has got a good response. In just a month, we have sold to 1,000 customers.
Nomura came on board in 2011. What has it brought to the table?
I will tell you first why the joint venture was needed. What we observed was that mutual fund is a different ball game. It cannot be managed by fund managers who manage insurance money. In insurance, the asset-liabilities are long-term and so you need long-term assets to match long-term liabilities. But in mutual funds, you have to churn the portfolio on a daily basis.
So, psychologically, our fund managers were not used to daily portfolio churning, frequent investment/redemption requests and high turnover ratio.
So, we thought we need to have someone to take care of our equity investments. We zeroed in on Nomura because ideologically we gel. It is not very aggressive, it is robust and financially sound and it follows a strict due diligence process for investment calls.
After Nomura took over, there have been a lot of structural changes in the management of equity. They have put in place a process for taking investment calls and are very methodical in stock selection.
How were funds managed earlier?
Not so methodically, I would say. As a result, we made some investment decisions which we should not have. We invested or exited at wrong times, as a result of which we lost money. But nobody can be blamed for that because the earlier fund managers were from LIC, where the investment culture is different.
Now, we have fund managers from Nomura and other fund houses. They have adequate industry experience. Now, we hope all our 11 equity schemes will give above-benchmark returns in the next three-five years.
Products in pipeline…
We do not have ETFs (exchange-traded funds). We will launch equity and bond ETFs next year. We also do not have capital protection-oriented funds, which we are going to file with Sebi soon. These will be managed by our new fund managers.
We have got Sebi approval for 14 FMPs, two of which have already collected over Rs 200 crore. Two more FMPs will be launched in the current financial year and another 10 by June this year.
Gold ETFs are very popular among retail investors. Are you not going to launch gold ETFs?
Gold is not an attractive investment option it was once upon a time. Even the government and the RBI are strongly against gold investments. It is not helping the economy either. Gold will not see the kind of rise it has been seeing in the past couple of years. It is not the right time to invest in gold or gold ETFs.
Investors like investing in gold. Don't you want to cash in on that investor psychology?
No. It is not the right time to invest in gold. If you invest at these levels and then lose money, you will shy away from these funds forever. We know for certain that gold will not give good returns from the current levels.
This is the tax-saving season and you have an ELSS fund. But why is all your focus on ULIS?
ULIS also gives Section 80 C benefits and so does the RGESS (Rajiv Gandhi Equity Saving Scheme), which we have launched recently. ELSS are standard tax-saving funds and all mutual funds have them. What new we can offer to investors? ULIS is a unique product.
Any budget expectations?
The Section 80C exemption is likely to go up. There could be a separate limit for insurance and annuity products.
We expect long-term capital gains tax on debt mutual fund to be removed. The RGESS may be liberalised. The cap of Rs 50,000 under RGESS may go up to Rs 1 lakh. The definition of new investors may also go up. The mandatory requirement of demat account may also be relaxed.