'SEBI's decisions are for the benefit of the customer'

The first hint about this revision was received when the Chairman spoke at the AMFI summit. The reason he gave for revision of TER was that the scale benefit needs to go to investors; higher the size, lower the fee. The second reason was that the slab has not been revised for many years, although the industry is now five times larger than it was when the slab was put in place. The third reason was concentration of the MF industry among the top five fund houses.

The impact of the revision on the MF industry will be marginal, as size will take care of the top-line. If the profit of the fund house is 25 basis points of the AUM, 1-1.5 basis points may be impacted.

The reduction of TER is higher in larger funds — above ₹50,000 crore in size. Many of our funds in the ₹10,000 crore to ₹50,000 crore asset size will see a drop in TER, which will have to be carefully calibrated between us and the distributor community.

There will also be a marginal drop in the income level of distributors and their business models may undergo a change.

While other assets such as ULIPs, PMS and alternative investment funds could see market share gains due to this revision, mutual funds will continue to get a dominant share of portfolio allocation of the retail investor. At the end of the day, the investor does not consider cost alone. He also looks at the brand, performance of funds, servicing record and trust.

Most of the changes that the SEBI imposes are a result of the natural evolution of the industry. The regulatory changes are decided at SEBI’s mutual fund advisory council. This council has only four members from the mutual fund industry. There are a couple of members from the media, legal representatives and a couple of investors as well. Thus, there is a collective voice. One does not supersede the other.

Then, there are practices that may need correction over a period of time. Today, the mutual fund industry is about 20 per cent of the banking industry; it used to be 12 per cent. Since the industry has grown in size as a serious intermediary in the financial services market, it would need higher surveillance and vigilance.

One area where SEBI could have probably helped us more is in distribution expansion. The insurance industry has 25 lakh agents. The MF industry has only about 1.5 lakh ARN holders. We need at least five lakh agents to reach all segments of the population. But if you look at the active number of MF distributors, it would only be around 45,000.

On regulations such as distributor expenses to be spent only out of scheme corpus, the thinking is that if one hand does not know what the other is doing, there is increased risk.

One can argue whether it is right or wrong, or if this is the right time. But SEBI’s decisions are taken mainly from the customer benefit angle.

That is a risk that we highlighted to the regulator when the expense ratio was being reduced. While SEBI’s thought process is in the right direction, and if the customer benefits in the long run, all of us benefit. But, at the same time, if other regulators have a different approach, especially in insurance with products such as ULIP, there is the high probability that some money will shift to the segment where the customer may or may not get the full benefit.

That said, when it comes to investing, mutual funds’ acceptance among the investing public is increasing.

So, the money we are spending on the Mutual Funds Sahi Hai campaign is to help take the industry to the next level. Also, today, fewer customers are thinking about redeeming their investments than about parking money.

I will break the number into two parts. One is the lump-sum investment and the second is the SIP investments. About ₹7,500 crore-7,800 crore comes in monthly from SIPs. Of that, Birla Sun Life Mutual Fund’s share is around ₹1,000 crore.

But in the HNI and lump-sum categories, there are redemptions to some extent, but the pull-out is not very large. Incremental flows make up around ₹7,800 crore-8,000 crore. Some of that is through NFOs also.

If you see persistency, including in ELSS, it is about 860 days — roughly two-and-a-half years. But again, if you dissect it in buckets, the persistency is much higher in the less than ₹1-lakh bucket. SIP persistency is far higher. Therefore, from an industry point of view, we are able to maintain retail investors holding for the long term.

The holding period of institutional customers is 90-100 days in the liquid funds; average holding is around 60 days. In fixed income, the average holding goes up because of the three-year holding stipulation for getting lower tax benefit.

In the same way, with the 10 per cent tax coming in for LTCG on equity, the average holding will definitely go beyond a year. So, different segments of the market have a different kinds of holding period. When you normalise this from an overall industry point of view, you get a true picture.

Second, for investors coming from smaller centres, say Varanasi, the holding period is almost 850 days. Whereas the holding period would be lower for a customer who comes from top 15 (T15) cities. A customer from a far-flung location may have lesser staying power, but willingness to stay is high. With rising contribution from beyond 30 (B30) centres, persistency is improving.

The idea of creating such a transaction platform was proposed by the SEBI and then developed by the AMFI. MFU is a common platform where neutrality is maintained, cost is relatively low and the ability to handle the volume is high. The vision of MFU is that it should be one of the digital platforms for the whole industry to make it technology-savvy. We also plan to promote MFU under mutual fund sahi hai .

The owners of MFU platform are the mutual fund players and we plan to allocate more capital to spend on this digital space and then open it up. AMFI’s chairman and CEO are currently working on this roadmap.

It is easy for fund managers to outperform the benchmark, even in large-cap funds. But it is increasingly becoming more difficult because the weights for few stocks in the index are very high; the index weights are skewed towards four to five stocks. But none of our fund managers like to hold more than 5-6 per cent of the fund assets in one stock; the only exception is HDFC Bank.

But the ability of large-cap funds to deliver returns that are 2-3 per cent higher even after accounting for expenses, is still higher, compared to what the perceived notion is.

Distributors’ unwillingness to sell is no reason for fewer index funds. The out-performance by a significant margin in Indian markets made us stick to active funds. I always give this example to my colleagues: say, stocks in the Sensex give 10 per cent return, the next 50 stocks give 10 plus 7 per cent and the rest 10 plus 15. That has been the scenario over the last three to four years.

None of us felt the need for index funds, given our ability to outperform the benchmark in the past. But there is a growing need for customers to allocate a certain portion of their portfolio to index funds; therefore, we cannot completely ignore index funds.

The 10-year return for the dynamic bond fund category is about 8 per cent, and for liquid funds it is around 7.5 per cent.

If this 50-70 basis points difference is compounded over a long period of time, it would result in substantial out-performance.

While making allocations to various avenues in the debt portfolio, at least 10-15 per cent must be invested in liquid mutual funds.

IL&FS is a company that was rated AAA and P1+ for the last 20 years. No company rated P1+ plus by Crisil or ICRA has ever defaulted. The default ratio on P1+ companies is 0.001 per cent. Fortunately, the mutual fund industry did not own much IL&FS paper.

That reflects our ability to avoid risk. The whole industry (42 funds with ₹12 lakh crore) owns only around ₹3,500 crore in IL&FS paper. It could have easily owned 5 per cent of the portfolio. So, the MF industry had a differentiated view on the issue — of not having so much of conviction on the IL&FS paper and the main company.

At Birla Sun Life MF, we have taken exposure to the operating company against the cash flows. When I lent money to the operating company, we didn’t lend to the main IL&FS because we didn’t see that as a viable model to run. That said, this incident is something not many would have expected. It is an accident like Satyam.

And since IL&FS is a financial services player, there is a cascade effect on the market.

NBFCs have been the primary drivers of growth ever since banks started slowing down, due to NPA issues and need for additional capital for further lending. Post these recent credit-related issues, availability of credit became a problem for this sector and many are now talking about de-growth for few years to maintain higher liquidity.

This has a cascading effect due to money not being available for borrowers and NBFCs not pushing loan growth. Money is the blood-line for all companies and if that is not available, slowdown in sales numbers is expected. The recent fall in some consumer durable stocks is due to the fear that lack of credit from NBFCs is affecting sales. This has happened in housing finance companies too. The problem is that all companies in a sector, whether good or bad, get affected when the sector slows down. But, in my view, this is temporary and, ultimately, the management’s ability to overcome these issues will be key. Companies that have seen such cycles multiple times will be able to handle this phase better. This is, however, an opportunity for fund managers.

Fixed-income schemes of mutual funds have invested 33-34 per cent of their assets in securities of NBFCs and HFCs. Our exposure is not low at all. Mutual funds have been among the largest funders of the NDFC industry over the last six to seven years.

Liquidity is something MFs are always cautious about, because we run open-ended funds and investors can apply for redemption any time. We thus try to own liquid assets in volatile times. Our decision to invest depends on the credit sentiment, movement of the asset price and whether investors are redeeming or investing. We are now fully invested in NBFCs and HFCs. We would not like to increase it to the SEBI’s limit of 40 per cent, given the above factors.

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