Ratings complements our offerings; will aid consistency: FundsIndia COO

Srikanth Meenakshi, co-founder and COO of FundsIndia.com, India’s first online investment platform for mutual funds and equities, possesses a dry wit, a gift for quotable one-liners and an elegant turn of phrase, often delivered with a dead-pan expression and in a soft voice, that it may be quite easy to miss a few but for the recorder.

Visiting Mumbai to announce the launch of the platform’s new rating services, Srikanth handled questions about the potential for conflict of interest given FundsIndia's distribution business, with characteristic forthrightness. Without ducking the issue, he acknowledged that investors may have their legitimate questions and doubts. But as he put it, he hoped they would also give them the ‘benefit of doubt’ rather than only the doubt itself. Although these questions may keep coming up, the platform’s track record would speak for itself, he said.

Excerpts from the interview:

Why have ratings?

There are 800 to 900 mutual fund schemes out there. There needs to be a way to sort out the good and the not-so-good. We had our own research team complementing our advisory team, and ever since we had our own list of curated funds that bound the universe from which our investors choose funds from, we have been wanting to have our own ratings system. This is not a trivial task. The research team has worked on it for several months and only with significant availability of bandwidth, did we even decide to dare something like this. It is a lot of onerous legwork that one needs to do. Choosing the right numbers and the right weights are big decisions to make – that comes from experience, being in the market, talking to fund managers and investors. We are serving investors – people who are putting their money. So the kind of weightage, the kind of ratings methodology that serves investors best, fine-tuned by talking to thousands of investors – all that requires a certain maturity and a good understanding of the profile of our customers. We are happy and proud to come up with our ratings system.

Morningstar, Crisil and Value Research are the three entities who have their ratings now. And none of them do distribution. We are the first distribution platform to have our own ratings. To me, that further cements our uniqueness in the spectrum of MF distributors. We aim to be a full-service, comprehensive platform. And these, including the technology backbone, are entirely developed by us. Ratings is not the last piece in the puzzle, it is another piece, in terms of filling out the suite of offerings.

The reason why we wanted to do ratings was to give MF investors a comprehensive set of MF services on a single platform and to allow them to evaluate how their MF holdings rate as compared to the plethora of funds out there. And we also did not want to have any ambivalence between our advisory calls and what we call our ratings. That potential for difference was always there when we relied on outside ratings. Value Research may have an opinion on a particular fund and we may have a different call on that fund. The mismatch between the call and the ratings was something we had to handle - but it grated over a period of time. You want the offerings to be consistent. When you are offering a service, you want it to be consistent with the different things you say about a fund - be it rating, call, advice, review, whatever. In that sense, ratings was the final piece of the puzzle. We were already doing advice, calls, research; the robo advisory was using these mechanisms – but the rating was an outlier, we were borrowing from outside. That is now complete with our own ratings services.

How much do investors rely on ratings?

It varies depending on investors. Some don’t go near a fund if it has below three-star ratings. Some people go just by what the advisor says, by our weekly calls, or the select funds, regardless of ratings. But ratings is not the first place they look, but one of the places. And it definitely serves as a sanity check for the investor.

What about the industry? Won’t you face some backlash?

(Laughs) – Hopefully there will be some front lashes also!

How will you maintain the independence required as a rating service when you are also an intermediary?

The industry knows us for some time now. Even now, we have our list of recommended funds (a list of 50 funds) and we do have experience of AMCs coming and asking us why their funds are not on the list. We explain to them why, based on our methodology, and then they can’t say much more. There may, of course, be situations in the future, where there is a five-star fund but which we have not recommended. They may question us then about this.

Will investors be able to appreciate this nuance – the difference in your rating and your calls/ advice/ recommendation?

There will be questions. It is up to us to address this. We are already trying to do this in internal communications. Rating is a little long-term in nature. There are some limitations to ratings because it cannot capture what is about to happen. It is quantitative in nature and captures past performance and gives some indication about future performance, because of rolling returns and patterns move. But some funds which shuffle their portfolio, may not immediately show up in our star ratings portfolio. That is where our recommended lists help. It will go beyond ratings. Ratings will be the base for it and it will look at several other qualitative factors. For fresh investment decisions, we have been telling investors to go with our list of recommended funds. There may be many funds that appeal to investors which they didn’t know was good or not. The ratings gives them a sort of idea about whether it is investment worthy. We have said anything above three-star rating is investment worthy.

What about the perception of conflict of interest?

It is a relevant question. Every other company that is in the rating business gets revenues through advertisements from mutual funds. There may be a potential conflict of interest there too, but I don’t question their rating. No institution is going to be devoid of such conflicts of interest in things like research and ratings. But over a period of time, we have established credibility in terms of research recommendations and I hope that credibility rubs off on the ratings as well. I hope we get the benefit of doubt as we enter into this rather than just the doubt!

We are never going to tire of that question. It is going to keep coming to us. That is par for the course. You have to go with conviction that you are doing the right thing and let the output speak for itself. Our select funds list has not been influenced by commissions, our advisory services have not been influenced by commissions, so ratings also won’t be influenced by commissions.

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