The mutual fund industry is experiencing turbulent times, with huge redemption from equity schemes. Regulations are set to get tighter, with the capital market regulator SEBI recently expressing displeasure over mutual funds not reaching out to investors in smaller towns.

Though the top five cities contribute 74 per cent to the industry’s assets under management and statistics show that penetration into the top five cities has been increasing steadily, SEBI is toying with the idea of weeding out non-serious players.

The regulator feels that the bottom 10 players who contribute less than 1 per cent of the industry’s AMC of Rs 7 lakh crore has not changed substantially in the last five years, reflecting that they have not made an effort to improve themselves.

Business Line spoke to G. Pradeepkumar, Chief Executive Officer, Union KBC Asset Management Company, among the latest entrants in the business from the Union Bank of India stable, for his views. Excerpts:

How would you describe your three-year experience in the business?

We are doing well compared to our peers, but not up to our expectations. Market condition was not conducive. Just like the others, we were also affected by net outflow from equity funds on a regular basis. Despite this, we are one of the fastest growing AMCs in the last two years. I’m satisfied that we have managed to bring in many first-time investors to mutual funds. We have close to 1 lakh folios and about 65 per cent have been first-time investors.

Right from the beginning, our strategy was to find our own space, because the market was pretty small compared to its potential. We were always confident that we could grow without eating into other’s business.

How difficult is it to sell equity funds now as investors have lost money?

People still appreciate mutual funds, particularly first-time investors. Mind you, we have lot of first-timers in this country.

If you are able to reach out and explain the benefits of long-term investments, they are receptive.

Thanks to the Union Bank of India distribution network with 3,500 branches, we are able to reach out across the country.

For example, there are regions in Eastern UP from where we get good retail business. Our market share in this region would be quite high compared to many other parts of the country.

What do you do to retain first-time investors?

Luckily, we are not that badly affected by redemptions. Most of the redemptions are by investors who invested at the peak of the market between 2006 and 2008. Our investors came in from 2011 onwards. Any investor who has invested in a fund for six to seven years and has not seen any growth, is likely to be disappointed. But it’s not a happy situation for us either.

We tell investors that the market will not remain depressed forever. To gain from the market, the fundamental thing is to be in the market. You can’t make money by watching from the sidelines.

Investors are scared of the volatility…?

Market is volatile because you don’t have strong institutional investors. Market is determined by foreign institutional investors. Domestic institutions are not large enough, because mutual funds are relatively small. Total equity portfolio of the mutual fund industry is very small compared to the market. We need to get pension funds with huge kitty to invest in equities.

If the mutual fund industry gets Rs 20,000 crore in flow every month instead of just Rs 4,000 crore, the whole equation will change.

SEBI plans to prescribe Rs 100 crore minimum capital for AMCs. What is your reaction and net worth?

There is a lot of debate on it. We are capitalised at Rs 120 crore. Mutual funds are a pass-through vehicle. The capital has limited influence as far as the protection to investors is concerned or the risk you pose to the market. Today, the net worth requirement is Rs 10 crore, but realistically can you set up and run an operation with Rs 10 crore?

There are people who manage to do that, but with a very specific business model which may not be applicable to a majority of mutual funds. The Rs 10-crore limit was fixed 20 years back, but with the current inflation rate, there may be a reason for keeping it slightly higher. Whether it should be Rs 100 crore or Rs 25 crore is debatable.

suresh.i@thehindu.co.in

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