We'll follow rule-based active investment style: Rajiv Shastri of NJ AMC

The CEO of an asset management company run by the country's largest MF distributor talks about how the fund house plans to create a niche and avoid conflict of interest

The country’s largest mutual fund (MF) distributor, NJ India, has entered the asset management space. Ahead of the launch of its first scheme in October, Rajiv Shastri, CEO of NJ Asset Management Company, tells Chirag Madia how the fund house plans to create a niche and avoid conflict of interest. Edited excerpts:

How will NJ Mutual Fund position its first offering, which is to be launched soon?

Our first fund will be the NJ Balanced Advantage Fund. We follow a rule-based active investment approach. It is quite different from passive investing as well as traditional discretionary active investing. We identify time-tested features and indicators for stocks, markets and the economy that are known to influence investment performance positively. For example, in stock selection we look at four parameters to identify the right stocks, like quality, value, momentum and low volatility. We have developed several data-based rules to identify the presence of these attributes in stocks. Complementary rules are combined to form protocols. Finally, based on the protocols we will select stocks and assign weights. The output of these protocols is implemented without any human intervention which makes it inherently disciplined and eliminates human bias. This makes us completely different from what is offered by the industry today. On the debt side, we will be investing only in treasury bills, government securities and tri party repo dealing system (TREPS). There will be no credit exposure in the scheme.

How does this offering stack up in terms of cost?

Rule-based active funds aren't passive funds. Passive funds replicate an external benchmark without any effort or expertise and it is natural that their expense ratios reflect that absence of effort and expertise. Rule-based active products entail significant effort in analysing data, devising rules and monitoring their performance. There is also considerable effort invested in the process of continuous improvement which keeps pace with the latest analysis and technology from across the world. Since there are some economies of scale that exist in our approach our expense ratio will be somewhat lower than traditional discretionary active funds.

NJ India is currently the biggest MF distributor in the country. Will the foray into asset management lead to conflict of interest?

Our positioning of funds is completely different from other fund houses. We see no reason to be a part of the traditional discretionary equity space where there are already several good funds available. As such, our positioning ensures that there is no conflict of interest for the NJ Group in its role as a mutual fund distributor. We are offering complementary products, not ones that compete with existing ones

As a fund house your focus will remain largely to equity or will you diversify towards debt and international funds too?

We would surely like to launch debt funds and international funds, but it will depend on how our markets mature. We are not going to launch products for the sake of doing it if we don't find enough of a distinction. On the equity side we may consider the launch of an equity linked saving scheme (ELSS) and international funds over time. However, on the corporate debt side it's very difficult to follow a rule-based approach because of the absence of trusted and reliable data since many borrowers are privately held companies. As and when the market matures, we might look at coming out with debt funds. Till then, we may consider offering options like an overnight fund and an arbitrage fund. All of these are, of course, subject to requisite regulatory approvals.

Currently, 80 per cent of the assets are cornered by top 10 fund houses. How challenging is it for a new entrant like you?

Yes, it’s true that the larger fund houses command the lion's share of industry assets. It is equally true that the composition of the top five and top ten keeps changing. Only two of the top five of 2006 are still in the top five and we also have 3 new entrants in the top 10 list. So, I am not worried much about the money managed by the top 10 players because if we serve the investor diligently, there is no reason why we shouldn't be a part of that group. Secondly, we are clearly different from other fund houses in terms of our investment approach and will be able to carve our own space.