BS Fund Manager: CEOs of top MFs quite confident about conquering Bharat

Chief executive officers (CEOs) of India’s top mutual funds (MFs) are betting on their enhanced digital reach and the success of the ‘Mutual fund sahi hai’ campaign to reach new corners of India. They see the industry reaching Rs 100 trillion in assets under management (AUM) in the next 10 years, with systematic investment plans (SIPs) reaching every household in the country. The CEOs say their work is cut out: Popularise debt MF offerings to provide bank fixed deposit investors with a like-for-like MF replacement and enhance distribution muscle.

However, MF heads are divided over the lack of talent in the industry. Some see the departure of big names as a concern, others believe the industry has enough lure to be able to continue getting the best talent. The panel discussion, titled ‘Journey Ahead: From India to Bharat’, took place at Business Standard’s latest BFSI Insight Summit. Those who participated included Aditya Birla Sun Life MF Managing Director (MD) & CEO A Balasubramanian; SBI MF Deputy MD D P Singh; HDFC MF CEO Navneet Munot; Kotak MF MD Nilesh Shah; ICICI Prudential MF MD & CEO Nimesh Shah; and Edelweiss MF MD & CEO Radhika Gupta. Edited excerpts:

Mutual funds have grown considerably. The AUM has surged to Rs 40 trillion. As a percentage of bank deposits it is at the highest-ever level of 22.5 per cent. Monthly SIP inflows have touched Rs 13,000 crore. However, the majority of the AUM (60 per cent) is from the top 10 cities. Why is the AUM concentrated in the top cities, and how do you plan to take mutual funds to Bharat?

D P Singh: The journey towards Bharat has already started. The industry is moving towards smaller towns by leveraging technology. The contribution from places beyond the top 30 cities (B30) are increasing at a good pace. In our case, the share of B30 in the total AUM has been rising steadily. Of course, we have a proprietary channel that helps us reach the B30 centres, but even other asset management companies (AMCs) are seeing inflows from B30 locations.

Technology has been an ally in this journey. It gives everyone access to the same set of tools, whether she is sitting in a posh locality of Mumbai or somewhere in the north-eastern parts of the country. Even people are now a lot friendlier with technology. Overall, we have already made a start and expect good growth in smaller towns going ahead.

Nimesh Shah: Indians have Rs 175 trillion in bank deposits. This money is waiting to be deployed in inflation-beating investment avenues. A decade back, mutual fund AUM was around 10-11 per cent of bank deposits. Today, it’s close to 22.5 per cent. In the next 8-10 years, deposits will go up to Rs 340-350 trillion, considering a growth rate of 10 per cent. If mutual fund AUM gets even close to one-third this number, we will be managing around Rs 120 trillion — three times our present AUM.

There are a lot of people who want to grow their money. On March 31, 2021, we had 5.5 million unique customers. The count rose to 7.7 million in one year. We took 23 years to on-board 5.5 million customers and just one year to get 2.2 million new investors. This growth is a result of digitisation and easing of the customer on-boarding process. There is enough growth potential going forward, and the future of the industry will depend on how well we manage risks. Volatility is here to stay and hence the onus is on us to create products that can balance out the volatility.

Nilesh Shah: Globally, the story of MF penetration has been akin to Birbal ki Khichdi. The penetration happens at a slow pace as we grow on word of mouth and references from satisfied customers. Our reach is driven by the happiness of our customers rather than how much commission we pay to the distributors. Across the world, we have seen that the MF growth graph is like the ‘J’ of a hockey stick. You have to build your credibility for the first 15-20 years and only then it receives mass acceptance. Hence, we cannot afford to mismanage risk.

MFs are a pull product and not a push product. The business is way beyond managing money. It’s about managing trust and confidence. We make the journey from India to Bharat based on customers’ happiness, on word of mouth publicity, by reducing intermediation and friction costs. Today, our cost and margins are lower than any other competing industry, except for the national pension system (NPS). Hopefully, as more and more customers get satisfied with our performance, our circle will keep expanding and we will move from India to Bharat.

Navneet Munot: The industry has been making efforts at better penetration since 2014 with the introduction of the B15 (beyond the top 15 cities) concept, which became B30 in 2018. Also, the two basis points that we spend on investor education has helped. Around 17 per cent of the MF industry’s AUM comes from B30 regions. If we look at just the equity AUM, the share of B30 is even higher, at 27 per cent. Also, one-third of the SIP AUM and 45 per cent of folios are from B30. If you look at the last 18-20 months’ growth, where technology has played a big part, almost 45 per cent of incremental folios are getting created in B30.

However, we still have a long way to go. We need to create awareness in smaller towns. We should also be aware that T30 cities are yet to be fully penetrated. There is potential to grow even in top cities. The unique MF investor count is still the same as the population of the top two cities. We have made immense efforts to expand our physical reach and invested in technology to make it easier for people to understand MFs and ease transactions.

Growth till now has come on the back of our wealth generation track record of the past 25 years. People have proof of how MFs have multiplied investors’ money multiple times and delivered inflation-beating returns. Strict regulation and unparalleled transparency have also helped in gaining trust. Lastly, it’s the investment in technology by the whole ecosystem.

Instead of comparing the overall industry’s AUM to bank deposits, we should compare debt fund AUM with bank deposits. In the last three to four years, fixed-income AUM as a percentage of bank deposits has declined. Bank deposits were Rs 100 trillion and fixed-income AUM was Rs 10 trillion a few years ago. While bank deposits have surged to Rs 175 trillion, fixed-income AUM has grown only to Rs 13 trillion. Equity AUM has grown faster but it has a lot to do with large mark-to-market gains and investments by the Employees’ Provident Fund Organisation.

Radhika Gupta: I will only focus on one number, and that is 37 million unique investors. The opportunity is massive. There is scope to raise our single-digit MF penetration to the world average of 40 per cent. I do a lot of public speaking, in the course of which I have seen that even a lot of well-educated people do not invest in MFs. But things are changing.

Two game-changing developments have happened in the industry in the recent past. The first is technology. Today, every phone is in some way a potential branch for us. I represent the youngest MF brand in this panel, and for us to scale up to an AUM of close to Rs 1 trillion would not have been possible without the help of technology, which has made our funds accessible from every corner of the country, despite us being physically present in just 25 locations.

The second game-changer has been the ‘Mutual fund sahi hai’ campaign. Very few industries would have seen all the players coming together to work for a common cause and be so successful at it. ‘Sahi hai’ has now become a part of pop culture. Today, you see characters of popular shows referring to ‘Mutual fund sahi hai’.

There are two aspects we can work on to gain ground in B30. First, we need to make MF distribution more attractive. Penetration will only happen when we have enough people on the ground. Second, we need to focus on retaining those investors who have come in post the Covid-19 pandemic. We need to build the right products for them and communicate properly. The first experience is the defining experience, and we have to ensure that these investors get the right service.

A Balasubramanian: As an industry, we can take pride in the success we have seen till now. With each passing year, the acceptance of MFs is growing. Technology has made it easier to invest in MFs, and our persistent work has made SIPs a way of life. We have put in a lot of hard work, and so have distributors, to take us to where we are now. Exactly 10 years back, a need was felt to spend two basis points of the AUM in investor education. The concept of B15 was also introduced and as it progressed well, we coined the term B30. This is proof of success.

The way things are moving, Bharat is not far away. I have travelled extensively across urban and rural parts of the country and I see that awareness about MFs is far higher than what people expect. People in rural areas have become comfortable with technology. The use of banking platforms has become common. In the next 10 years, I see a scenario where ‘har ghar mein ek SIP hoga’.

We do not have any match when it comes to positioning, governance and risk management. All the information is in the public domain and hence we face high scrutiny. This helped us become better and stronger. Whenever I go overseas, I am asked when domestic flows will subside, so that they get their hands on Indian stocks. We have to just build on it and take it to Bharat.

Only about 10 per cent of MF investors have investments in debt schemes. Why is that so?

Nimesh Shah: We take credit for whatever good has happened till now. We should also take responsibility for things that have not happened. All our debt products are superior to any other competing product in the fixed-income space. There is a need to put in more effort to popularise debt schemes. We have managed debt funds pretty well but have not managed to communicate well. We see debt as an important growth area.

Going forward, the biggest fund house will be the one which manages debt well. Indians want less volatility and hence debt is the right fit. In the last 10 years, we have done well to convey the equity message. We need to do similar work in debt. The fact that debt funds have delivered superior returns in the last 20-25 years compared with other fixed-income options has to be conveyed to investors.

Balasubramanian: There was a time when we made attempts to popularise debt. We had planned a ‘fixed income bhi sahi hai’ campaign. Looking at it from a saver’s point of view, not everyone is focused on wealth creation, for which equity is the right option. Many have regular income generation needs and for them debt is a better option. Fixed income should be a part of every asset allocation. The asset class’s performance is linked to the interest rate. The cyclical movement of interest rates leads to opportunities in fixed income.

Munot: Out of the 140 million folios as of November-end, only 6 per cent are in debt funds. It shows the growth potential in debt. In this regard, government and policymakers need to realise that growth of debt funds is crucial for the development of the corporate bond market in India. The bond market will only develop when the debt MF industry grows bigger. For the country’s growth, governments, PSUs and even corporate India will have to borrow large sums and hence there is a need for a deep money market. Growth of debt funds can help here.

Singh: In the case of debt, we should also highlight tax efficiency. Investors can save a lot on taxes by investing in debt MFs. Until now, debt funds have only reached wholesale investors, which are corporates and institutions. We never looked at retail investors as an audience in a big way. There is some awareness in the bigger cities, but beyond that the message is yet to reach. The first step is to educate the intermediaries. Products also must be fairly priced. 

Gupta: We at Edelweiss have seen tremendous growth on the fixed-income side after the launch of a very different product called Bharat Bond ETF, which led to the emergence of target maturity funds. This is because of the simplicity of the product. Banks have been successful at it by reducing the decision-making levers: “Invest in a FD for this much time and this is what you will get”. Fixed-income investors do not generally understand what is duration risk or credit risk. The reason behind the success of Bharat Bond is that it changed the conversation from complexity of debt to goals. Besides, debt funds have a huge advantage on the taxation front. This product line alone has the potential to bring FD customers to MFs.

The industry has lost four star fund managers — Prashant Jain, Madhusudan Kela, Sunil Singhania and Kenneth Andrade — in a matter of a few years. Is lack of talent a concern in the industry?

Nilesh Shah: Undoubtedly, talent is an issue. In the 1990s and 2000s, when we were managing money, we didn’t have to worry about alpha. We were so consistently generating it. Now, alpha generation has come down, as markets have become competitive. To add value for my customers, I need to have the best resources. Today, that is a challenge. Globally, we have seen that private equity and hedge funds attract the best talent, because they pay well.

One of the reasons why many offshore MFs are under-performing benchmarks is the lack of good talent. In India also, we need the right people to be able to compete with other offerings. Obviously, there is a need for the next Prashant Jain, Madhusudan Kela and Sunil Singhania in the industry. Hopefully, this will happen, because the MF industry not only offers good money, but also the blessings of customers who have realised their dreams by investing in MFs.

Munot: I think the institutionalisation of processes in the last 25 years has reduced the dependence on a single person. And we should take credit for that. There will always be individuals who will be remembered for their services. But, we are better placed to deal with this issue now, given the institutionalisation that has happened at the industry level with the help of the regulator. Nimesh said rightly that asset management is more about risk management than money management. The establishment of processes has been a crucial step in this regard.

Gupta: For every legend leaving the industry, there is a big pool of young talent wanting to join the MF industry, including from industries such as portfolio management services (PMS) and alternative investment funds (AIFs). Generating alpha may be difficult in MFs, given the large number of disclosures and compliances, but this is the stage where young people have the opportunity to make a public track record.

You would know about very few AIF or PMS managers who are as popular as Prashant Jain or Sunil Singhania. They became popular only because they have managed public money for several years and have been successful at it. People work for more than just money — they also work for name and legacy.

Nimesh Shah: Talent has not been an issue for us. At ICICI Prudential we have learnt to manufacture fund managers. We haven’t recruited talent from outside for several years. Fund management is all about building a culture over a period of time within the organisation. As Navneet said, institutionalisation of processes has helped. In the last 20 years, some of our funds have gone from one hand to another, but consistency has remained in their management.

We have created a big team of analysts and we let them analyse various stocks and sectors for over 10 years. At the end of this phase, they are ready to take over the role of a fund manager if someone leaves. You can see that in our performances. Fund managers have left, but performance has not been affected.