 "If benchmark is beaten, fees can be justified: Nimesh Shah")
Recently, several close-ended equity schemes have been launched. ICICI Prudential Mutual Fund came up with its close-ended value series which mopped up close to Rs 650 crore. Industry experts say that higher upfront commission have played a vital role in collection of sums and mis-selling may not be ruled out. Nimesh Shah, MD & chief executive officer of ICICI Prudential Mutual Fund disagrees with such allegations. In a conversation with Chandan Kishore Kant, he explains how customers get a fair deal by investing in value fund with a three years perspective. Excerpts :
What has prompted you to come out with a close-ended equity product?
We want to make money for our investors and that will have positive repercussions on our brand. Today there is an opportunity to invest in value. For me it's a brand building exercise. I believe in the next three years money can be made out of value. What close-ended structure ensures, I can invest 100% into mid-caps. If you see the mid-cap, they are available at an extremely cheap valuation.
As an investor, I would also think in the next three years that whether large-cap funds are going to make money for me or mid cap funds. And my belief is that this kind of strategy can make money over the next three five years. That's why we went to the distributors and investors. The problem in India is that people look at the past performance and then come to invest. Rather than looking at whether the sector is available cheap or expensive. We are only capable of beating the benchmarks. We endeavour that on a consistent basis we are able to beat the benchmarks then only we can justify the fees.That's the only thing I can give to the customer. After taking the fees I should beat the benchmarks. I do not have absolute return expertise. Money came because of our track record on equities. I think we have done a good job for the final investor.
Critics say it is purely the higher upfront commissions to distributors that has helped you garner assets in your close-ended new fund offer.
It is a question of the charge to the fund as per the Sebi's guidelines. Whether it is an open-ended or a close-ended fund, the yearly charge for the customer is going to be the same. So, if I can take money out from my pocket and give it to the distributors upfront, which I believe is necessary as then only he will be able to sell. And if he sells to the customer then we get a good deal. So, is the customer getting a good deal? For me that's the most important thing. Hundred per cent of the AUM of this company is working for the benefit of the final customer. Is value fund beneficial for the final customer? Yes. Will the distributor make good money by selling this? Yes. So, it will be profitable for all three of us. All stakeholders have got a good deal in the value fund.
Industry insiders say commissions are as high as 4-8 percentage points. Will that not lead to mis-selling?
There is no mis-selling. Can I force anybody to swing his investments? Then I would want all the money in the industry. Also, in my fund, it is not possible. It's a three year period fund. Total charge on the customer cannot be more than the Sebi's guidelines. It will be 2.5% charge on the customer every year - which makes it 7.5% for three years. So, we and distributors - put together cannot earn more than 7.5%. So, it is up to us how much out of 7.5% is given to distributors and how much is kept with us. The customer will get a fair deal.
Of course. If I am charging every year 2.5% to the customer, total charge which can be debited is only 7.5%. Now, since I know that money is going to be there for three years, I have to decide how much I need to pay the distributors. The figures you mentioned are nowhere near what I can pay. It is a commercial decision between me and the distributors. There are lot of distributors who do not want this much upfront. They want it in three years. On the other hand, there are some who want it upfront. So, it does not matter. I am okay either ways as an AMC.
Look at the last three-four years. Any product which has got the performance has got sales. If you have got performance, you will get money. Whether it is ICICI Prudential or any other AMC. People will not give you money if you do not have performance.
What has prompted you to come out with a close-ended equity product?
We want to make money for our investors and that will have positive repercussions on our brand. Today there is an opportunity to invest in value. For me it's a brand building exercise. I believe in the next three years money can be made out of value. What close-ended structure ensures, I can invest 100% into mid-caps. If you see the mid-cap, they are available at an extremely cheap valuation.
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What if the markets fall? Investors may get trapped in this product as it has happened in the past.
As an investor, I would also think in the next three years that whether large-cap funds are going to make money for me or mid cap funds. And my belief is that this kind of strategy can make money over the next three five years. That's why we went to the distributors and investors. The problem in India is that people look at the past performance and then come to invest. Rather than looking at whether the sector is available cheap or expensive. We are only capable of beating the benchmarks. We endeavour that on a consistent basis we are able to beat the benchmarks then only we can justify the fees.That's the only thing I can give to the customer. After taking the fees I should beat the benchmarks. I do not have absolute return expertise. Money came because of our track record on equities. I think we have done a good job for the final investor.
Critics say it is purely the higher upfront commissions to distributors that has helped you garner assets in your close-ended new fund offer.
It is a question of the charge to the fund as per the Sebi's guidelines. Whether it is an open-ended or a close-ended fund, the yearly charge for the customer is going to be the same. So, if I can take money out from my pocket and give it to the distributors upfront, which I believe is necessary as then only he will be able to sell. And if he sells to the customer then we get a good deal. So, is the customer getting a good deal? For me that's the most important thing. Hundred per cent of the AUM of this company is working for the benefit of the final customer. Is value fund beneficial for the final customer? Yes. Will the distributor make good money by selling this? Yes. So, it will be profitable for all three of us. All stakeholders have got a good deal in the value fund.
Industry insiders say commissions are as high as 4-8 percentage points. Will that not lead to mis-selling?
There is no mis-selling. Can I force anybody to swing his investments? Then I would want all the money in the industry. Also, in my fund, it is not possible. It's a three year period fund. Total charge on the customer cannot be more than the Sebi's guidelines. It will be 2.5% charge on the customer every year - which makes it 7.5% for three years. So, we and distributors - put together cannot earn more than 7.5%. So, it is up to us how much out of 7.5% is given to distributors and how much is kept with us. The customer will get a fair deal.
Of course. If I am charging every year 2.5% to the customer, total charge which can be debited is only 7.5%. Now, since I know that money is going to be there for three years, I have to decide how much I need to pay the distributors. The figures you mentioned are nowhere near what I can pay. It is a commercial decision between me and the distributors. There are lot of distributors who do not want this much upfront. They want it in three years. On the other hand, there are some who want it upfront. So, it does not matter. I am okay either ways as an AMC.
Look at the last three-four years. Any product which has got the performance has got sales. If you have got performance, you will get money. Whether it is ICICI Prudential or any other AMC. People will not give you money if you do not have performance.