Passively managed funds will gain market share in future: NJ India's Choksi

Indian investors don't understand smart-beta products yet, says Neeraj Choksi

NJ India Invest, the largest mutual fund (MF) distributor in the country in terms of commissions, has sought approval from the Securities and Exchange Board of India (Sebi) to start its own MF business. Neeraj Choksi, co-founder of NJ India, tells Jash Kriplani in an interview why his firm wants to diversify into the fund management business and shares his views on the changing industry dynamics following the new fee structure. Edited excerpts:

What drew you to the fund management business?

We want to create a business centered around exchange-traded funds. Globally, we are seeing huge demand for smart-beta products. Passive funds are gaining popularity, while actively-managed funds are seeing fading investor interest. 

While not immediately, we do see these trends playing out in India as well, and passively managed products will gain market share going ahead. 

Would you look at any acquisition to help you with the foray into fund management?

We already have some inherent strengths. For instance, we have the technology expertise for creating smart-beta products. Such products need quantitative analytics and we have been using technology for our distribution business. 

Apart from technology, having a distribution platform is another advantage as it can help in reaching out to investors. Our distribution platform will continue to be managed as an independent entity.

Indian investors don’t understand smart-beta products yet. How do you plan to expand the business with investor awareness still quite low?

Like we said, we don’t see immediate traction. We need to wait and see how things shape up over the next couple of years. As far as educating investors is concerned, our distribution platform can help us in doing that. The Registered investment advisors (RIAs) can also play a key role in making investors aware of such products. 

Was the decision to enter fund management prompted by the fee cut and the expected cut in distributor commissions?

Whether it is fund management or distribution, commissions and  fees have come down. The new norms by Sebi state that as the size of the fund increases, there will be a further fall in expenses to be charged to investors. We feel that market forces are acting in a way that could lead to higher market share for low-cost products.

Do you see investor money moving from actively-managed funds to passive funds?

Actively-managed funds have outperformed their benchmarks in the past years. 

However, going ahead, it could be difficult for such funds to continue to outperform. Further, in an industry where margins are expected to be under pressure, passively-managed funds offer a low-cost alternative. The industry dynamics are now more suitable towards a volume-driven business model, rather than a margin-focused one. Efficient use of technology will be a key factor in maintaining a low-cost structure.