A Crucial Juncture For The MF Industry

Nilesh Sathe, Director & Chief Executive Officer, LIC Nomura Mutual Fund talks about the need for consistency in performance of funds, and about the importance of finding out why retail investors are shying away from the mutual funds market

What is important for investors at this point of time-growth or safety of capital? 

Both. We have seen what has happened with various NBFCs and chits (or cheats?) in West Bengal, UP, Karnataka and the rest of India. There are lots of fake NBFCs which default, and investors end up losing their hard-earned money. So, investors should be careful before investing. One shouldn’t invest in a class of asset where investment doesn’t grow. There should be a good balance between safety of capital and growth of investment. 

Coming to the fund management industry, at what stage are we currently in? Nascent, matured or probably somewhere in between?

I think we are somewhere in between. Different fund houses have different focus. It depends on your investment policy. If you want to give highest returns; you need to compromise your asset class. If your investment policy permits you to take that risk, you can go ahead with that. But in the process, if you fail even once, the customer may never come back to you. So, consistency of performance is very important rather than going on top and then tumbling down.

What would be your view on the current economic condition of the country? 

We cannot evaluate the performance of the economy in isolation. We need to look at the emerging economies of the world. Are others growing at a faster pace than us? That our GDP has come down to four to five per cent from seven to eight per cent is a fact, but are the other countries able to show growth of seven to eight per cent? The answer is NO. Most of the countries across the globe have shown a downward trend in their growth rate. I think there is not much to worry about the reduction in GDP growth. 

Ben Bernanke’s Federal Bank policy has helped the US and affected the developing countries. The bond rate in the US has increased to almost three per cent, which is a safe investment. Why should one invest in other countries at the cost of taking a currency risk if he is getting a reasonable interest rate in the US? Other currencies are weak as compared to the dollar. Hence, most of the FIIs started withdrawing their money from the Indian debt and equity market and started investing in the US. Hence, this has impacted various countries like India, Brazil and Russia and so on.

If the risk-return parity improves, then FIIs would come back. If they wish to invest in other countries, India would be their first choice since we have democracy, a robust financial system and the RBI remains always independent of political pressures.

The government’s balance sheet is a major problem. Do you see the situation getting better soon? 

We may not see the results over-night. It is important to see whether we are going in the right direction. We have not changed our fundamentals. We need to help the poor. We don’t have a capitalist economy, where everyone needs to compete with each other and survival of the fittest rules. At the same time, we are not averse to FIIs. The CAD position has improved and we could end up below 4.8 per cent, which is a good sign. 

Currently, everyone is talking about the Food Security Bill as the subsidy of Rs 1.1 lakh crore is likely to affect the CAD. However, we cannot afford to keep the majority of our countrymen hungry if we do not want them to lift weapons to seize food.

What is your view on the reforms the mutual funds industry has recently witnessed? 

The mutual funds industry is at its lowest ebb today. A plethora of regulations has been introduced in the name of protecting investors’ interests, as if the mutual fund industry and the distributors have only one purpose, i.e. to cheat investors. No one has time to find out why investors are shying away from mutual funds.

For example, before investing in mutual funds, you get a statutory warning “Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing”. As it is, the general investors are risk averse. Why will they invest money in MFs, which have higher risks and have failed to give even a risk-free rate of return?

The KYC process in MFs is positively scary as it is outsourced. For banks, KYC is done by bank officials and hence, opening an account in banks is much easier. No MF official has any discretionary authority. The rules are unduly strict and designed in such a way that no one will voluntarily come to mutual funds for investment. 

Everyone knows that mutual funds are difficult to sell because it is an investment, whereas insurance is easy to sell as everyone wants to secure their family’s future after their death. Research house Market Mantra says that if a product is difficult to sell, the distributor should get higher commission. But here, the situation is woefully different. Insurance agents get much higher commission than MF agents. This is a major reason why we are not in a position to take advantage of the over 11 lakh LIC agents.

Have you taken any steps for investor awareness? 

LIC Mutual Fund before 2011 and LIC Nomura Mutual Fund thereafter have been conducting investor education programmes regularly. This was even before the SEBI’s September 2012 circular, according to which two basis points of every Rs 100 in AUM is to be kept aside for investor education. After setting aside two basis points, this initiative has been further streamlined. This year, we have decided that we will have two hoardings in 26 cities for three months starting from October 2013, with some educational message for investors. In addition, we have asked our 26 area offices to conduct at least one investor education meet every month. Besides all this, we write articles in print media to make the public aware that mutual fund investment is also a scheme for asset creation. 

What are the steps that should be taken to bring more retail participants into this industry?

Retailers need some sort of advice. With my 28 years of experience in insurance, I found that even though insurance is a necessity, not a single person came to take insurance by seeing the hoarding or a newspaper advertisement. There should be some representatives who educate them about the importance of insurance and how their money can grow systematically. Same is the case with other financial products. 

We have noticed that when there was only UTI, there were some 1.5 lakh distributors for just one mutual fund. Now, there are 44 mutual funds and the total numbers of distributors have come down to 28000. It is difficult for the industry to grow when there is no one to canvas for the mutual fund. So, we must increase the number of distributors to promote this industry.

What is your advice for retail investors at this juncture? 

Never keep all your eggs in one basket. We have seen gold prices rising, but not uniformly. We have seen the equity markets giving fantastic returns, but it was not always so. On the other hand, banks have given 9-10 per cent returns many a time, but the interest rates also keep fluctuating. So, one should invest in different asset classes, and mutual funds should also be one of them. Don’t get convinced by agents. Don’t sign on a dotted line. There is no point in repenting later for a wrong decision made. If someone is offering exorbitant returns of 30-40 per cent where banks are offering 10 per cent, there must be something fishy. 

If your risk appetite is high, invest in the equity market. If your risk appetite is low, invest in fixed income schemes of mutual funds or in bank fixed deposits. Gold can be also considered as an investment (though not as ornaments), but again, one needs to pay locker rent to the bank for its safety.