Large-caps still offer a lot of scope for growth and price discovery: Mirae Asset MF CEO Swarup Mohanty

All said and done, the Indian equity markets are illiquid beyond a point. There are two sides to the story. There is market cap and there is free float. As a risk control measure, we think that there is that much free float one should own and beyond that the risk is quite high. Otherwise, when you go to sell securities, they won’t get sold without impact costs. So as a risk measure, we do try to accept money within a limit that will enable us to keep our portfolios liquid.

You see, midcap funds earlier would take about 10 years to get to a ₹4,000-crore AUM. But we went from a small AUM to ₹2,200 crore in about six months and the fund was adding as much as ₹200-220 crore per month and we were not comfortable with that kind of inflow in 2016. The restrictions have helped us keep inflows to levels we are comfortable with. The fund has since gone from ₹2,200 crore to ₹22,000 crore and our performance has remained satisfactory. This is our flagship fund and it has a good track record, we don’t want it blemished.

Today, SEBI’s categorisation has restricted the number of active categories that an AMC may have products in. Therefore, ideation is mostly happening on the passive side, where the AMCs are free to do so. We would like to position ourselves more in the non-market cap based indices space. At Mirae, we have created three indices, including the Mirae Asset Nifty Financial Services ETF and the India Manufacturing ETF where we offer passive funds. We offer the only passive ESG fund in the market. On the global themes, we can still do a lot. Yes, we have various market cap ETFs with controlled tracking error and cost but we would like to operate in spaces where we can have a good differentiated strategy.

Presently, our fund management team works with a thorough screened investment universe in the large- and mid-cap spaces. To have a small-cap fund, we need to broaden that universe. Small-cap investing calls for some special skills in the Indian context and we would like to build that capability in our team before we launch a pure small-cap product. Like specialised credit risk managers in debt funds, we also need specialised equity talent for small-caps and micro-caps. Getting that talent is tough. We need managers who wouldn’t go out of our stock universe and would adhere to our risk management guardrails. The fund management team we have has been with us for a long time. So, when we add to our team, we are conscious of finding talented fund managers and analysts who will fit into our mindset and investment philosophy. In the active space, we just got the approval to launch a flexi-cap fund which would allow an 8-10 per cent small-cap allocation. With a multi-cap fund, we can have up to a 25 per cent allocation and start our journey towards more active tracking of small-caps.

I personally feel that credit risk funds should not be offered by mutual funds as MFs cater to a lot of retail investors too. I feel they should be on the Alternative Investment Fund (AIF) platform. When you are getting FD investors into debt funds, one can easily get them into credit funds showcasing the returns, without telling them about credit risks. In equities, even if there is a mishap, there are chances of making up the loss through other investments. But in credit risk debt funds, there is little chance of recovering your capital if you lose it. We did have exposures to some of the credit affected papers in our funds, but we managed to exit them at the right time. I give credit to Mahendra Jajoo our CIO -Debt fund Management, that Mirae Asset in India has not had a credit issue in our 14-year track record so far. That’s a record we would like to preserve.

We at Mirae are constructive on equities at this moment. Maybe in the short run, the market is looking a little expensive, but India’s $3-trillion economy is surely going to $6 trillion. People say large-caps offer limited scope for stock picking or returns. But in the Indian large-cap space, the difference between the 1st and 100th company is 35 times in market cap. If you see the midcap universe, the difference between the 101st stock and 250th stock, is only three times. For small-caps, similarly the difference between the biggest and smallest stock in market cap is three times. This makes us believe that large-caps still offer a lot of scope for growth and price discovery. If someone says there is no value in large-caps, I disagree. With a big spread of 35 times, it indicates the growth left in this space.

There’s another reason for this belief too. If you see any industry or sector in India, in the last four-five years, the top 5-6 companies’ market share has gone up significantly. Large companies have stronger balance sheet cash. They can withstand turbulent times better and also can benefit from inorganic growth opportunities. In such scenarios, small- and mid-caps get tested. This has been our view since Covid. The broad state of the country and demography is to the benefit of these leaders. Yes, the one challenge for the economy is creating enough employment and we have to be creative on this or else this demographic advantage can become our liability in the future. The next 10 years will probably be a phase in the Indian markets which are good for equities. If we handle our economy well, the next 10 years could sustain, but one has to watch the progress.

For investors, the risk of not investing is becoming larger. Investors now understand that equity is a long-term play. Let me give you an example of this. Our Mirae NYSE FANG + fund, which invests in US tech stocks, is down 25 per cent from its peak due to the US tech meltdown so far. Earlier, we would get frantic calls, saying that it is a bad product or that Mirae should not have launched it. But what we are seeing is investors asking us when the regulatory cap would be revised to allow fresh investments in this category. Investors today are very well-informed. This is a clear deviation from what used to happen five years ago. The risk profile of investors is changing.

Not having a bank sponsor actually frees you. We had a very differentiated strategy from the beginning. When the market was fully upfront commission driven, we educated distributors on trail commission and its long-term benefits. Mirae went into full trail in 2011. The power of trail is massive with growth of NAV, that has paid off. We don’t have any B-30 strategy; we are present in only 23 cities. Ten years ago, we realised that MFs would penetrate the country through the digital route. Our share of the digital market is far bigger today than some of the larger AMCs. Apart from this, we consciously went to individual MFDs in the beginning, then two large banks approved us and we could break into the Indian private wealth space with our performance. We have consciously avoided concentration either with a few distributors or a few investors. Today, we have almost 57 lakh folios and a ₹855-crore SIP book. Our largest distributor is ₹4,200 crore, our largest single client is ₹1,900 crore, our top 100 IFAs bring in ₹10,000 crore. So, that is how diversified we are.