Good at saving, bad at investing

Short-term volatility notwithstanding, mutual funds are among the most-transparent investment vehicles. That was the consensus at the Business Standard Fund Cafe held in Mumbai on October 24. The chiefs of six leading fund houses said they were confident of MFs becoming the preferred choice for financial sector investors. The round table was moderated by Shyamal Majumdar. Edited excerpts:

Is the retail investor-fund manager disconnect hurting collection of assets?

A Balasubramanian: The compound annual growth rate (CAGR) of the MF industry is 19.8 per cent; for the insurance industry, 20 per cent. The average deposit growth has been nine per cent. I think the sector has done a fabulous job of growing its assets. There is a study by the National Research Council (NRC) which says of the 220 million households, 10 per cent invest in financial assets and within that 90 per cent have assets in postal savings deposit and other assured schemes. The balance is invested in capital market assets. That indicates the kind of opportunities that exist. In the next six months, I would say positive vibes would certainly come back, supported by a strong monsoon which would have a very good impact on improving rural income. In the US, we have seen the highest-ever inflows into equities, largely from money moving from debt to equities. That is another proof of the trend that is emerging. It will come to India as well, albeit with a bit of a lag.

Nimesh Shah: The investors do not understand that we are relative performers. That is, we strive to beat the benchmark. So, if the market goes down 20 per cent and the fund goes down 10 per cent, that's outperformance for us. Investors don't understand this; they always look for fixed-deposit (FD)-plus returns.

Milind Barve: We have a 24 per cent household savings rate and very low penetration of capital market products, which includes MF and insurance. From that perspective, I think India is an obvious market to be in. But it is not a market which is easy to penetrate. It requires a lot of hard work. You start a business and you became a part of the growth of the sector. If the awareness of a fund product is very low, you need to create a reasonable record of its investment performance and you start getting recognised by investors and distributors. Right now, we are getting influenced by what has happened in the immediate past where savings have come down. Bank deposit growth rate itself has been the lowest in the last five to six years. When people shift back to investing in financial assets, we will see investments coming back to mutual funds also.

What is the industry doing to manage expectations?

Sundeep Sikka: First, as the Association of Mutual Funds in India (AMFI), we have done 1,000 investment camps across the country and a majority of these were in small cities. India is a country of savers. We have a good savings rate. We are good in savings, but when it comes to investing we are bad. The biggest challenge is two per cent of the national savings is coming into the capital markets and 98 per cent in other financial assets. Now, we don't look at the NAV of it on a daily basis. They invest in real estate, they buy in gold and they buy in gold from a long-term perspective. But when it comes to the mutual fund industry, we are under the media glare, for NAV, for performance, weekly monthly, annual… It is just a matter of time that people will realise that putting money in banks is the biggest mistake of their lives. Because ultimately, it is eroding. Investors are going to have to distinguish between savings and investments. I can't comment on the next six months. But I am sure in five years, the total size of the sector is going to be bigger than Rs 20 lakh crore.

Ashu Suyash: We have identified 200 districts which are beyond the top 15-cities and each asset management company (AMC) is adopting a few. Besides the usual campaigning and advertising in these districts, additional efforts are being made to bring more distributors by enrolling the youth to pick this up as a part-time vocation. The important thing here is that the task at hand is very large. Less than two per cent comes to the capital markets and an even lesser amount comes into mutual funds. So, it's very easy to draw conclusions that nothing is being done and it is surrogate-advertising. That's not the case. We believe that investor education has a number of pillars: awareness, high quality material and camps. The fourth pillar is very important as it equips that very important leg of the industry to offer the last mile connect. Today, when data is presented on top-15 cities and beyond, the effort going into the smaller towns and cities is not reflected in those numbers. But give it another couple of years and you will see a marked difference.

Deepak Kumar Chatterjee: The insurance sector has a large number of distributors, while the active MF distributors are few. There is going to be a change in the way the MF products are sold. There is a distinction between those selling and advising. Those who are selling will be entitled to the fees embedded in the product and those advising can collect the fees only from the investor. The grey area is if someone who is selling is asked questions. There cannot be selling without advising. But more business will shift to the advisory side. Will investors pay for advice? They would. I would like to give an example: From Mumbai to Pune, you can either take the expressway or the old highway, which is free. But still most people take the expressway. If people see value they will happily pay. The Indian culture of getting free lunches is gradually coming to an end.

Does the industry have too many non-serious players?

Barve: I genuinely believe all the players are as serious as the top 10. My sense is the amount of capital is not the only indicator of its seriousness. We need to fund the losses till you break even. So, to my mind, some smaller players have done very innovative things on product development. It's not very uncommon for the top seven or eight control about 50 per cent of the market. As more fund houses increase their distribution and whenever saving rate go up, we will see wider distribution. I genuinely believe all players, even the smaller ones, are as serious as the top 10 players. My sense is the amount of capital is not the only indicator of its seriousness.

Retail investors are aggressively investing in tax-free bonds. Is it a cause of concern?

Shah: The returns investors have got from tax-free bonds in the past have been good. Gold and real estate have also given good returns in the last seven to eight years. But one has to believe in cycles. We know what happened to real estate in Mumbai from 1994-2003. So I am a firm believer of cycles. In investment, we don't change strategy after failure, we change strategy after success. When a fund has done very well, at that point of time you revisit your portfolio: What can you do next? I think in the last six years, the equity markets have gone nowhere. But today's 21,000 is quite different from the earlier 21,000. The P/E ratios are much lower now. In 2008, only infrastructure companies had a P/E ratio of 40. Now, within Nifty, there are 15 stocks at a P/E of 35 to 40. In the rest of the market, there is lot of value available. What the retail investors should do is revisit their strategy. There is so much value available in mid-cap companies. Investors have to decide whether they want to invest in mid-caps or stay invested in what has made money in the past. In equities, I believe what has made returns in the past will not make returns in future. Similarly, on other asset classes, people need to revisit their investment portfolio.

Suyash: Everybody is talking about 8.5 per cent returns on tax-free bonds. You are talking of blocking the money for 15 years. In a product like FMP that our industry offers, you don't have to lock in your money, but you get returns that are similar. But if someone looks at the 15 year-returns on equities, it beats them hands down. By definition, if you hold equity for more than a year, it is a tax-free product. So, I think getting out of mutual funds totally is bad idea. It is about revising your asset allocation and rebalancing the portfolio across equity and debt. Only that much should go into tax-free bonds, which you want to allocate for the long term. The returns of the bonds adjusted for inflation are not very great. There are other good opportunities and it's not a great idea to lock your money for such a long period.

Balasubramanian: Historically, the returns delivered by the Sensex or even mid-cap stocks are far greater than 8.5 per cent. So I think ultimately what matters is allocation.

Barve: A big challenge for the industry is to get investors through distributors. If you understand that long-term is nothing more than the tax definition of one-year or three- years, then clearly you will look only at the immediate past and base your decision on that. There are a number of funds which have delivered consistently by beating the benchmark for seven, ten years. If you look at outperformance over say a seven-year period, the absolute returns are far greater. So the longer you stay, the outperformance is more meaningful.

Should the industry concentrate on simple products instead of offering a large bouquet that confuses the investor?

Barve: We have a proliferation of products and strategies that appeal to sophisticated investors. If you cannot connect with investors, what's the use? Some complications are inevitable but for a new investor, the offering has to be simple, like an equity diversified scheme or liquid scheme in debt. As investor awareness grows, we can handhold them with complex products. As far as equities are concerned the products should be simply unconstrained diversified, multi-cap funds with no particular style or theme. By and large these funds have created good performance. Some complications are inevitable as we have so many options like direct, growth, dividend, etc. So in one scheme, there are six options. That also is confusing people. I think regulator is more ware and not allowing fund houses to launch products that are similar.

Sikka: Systematic investment plan (SIP) as a concept was successful. So was micro SIP, which helped overcome the mental block of investing in equities. Investors started with a small sum and started investing in bigger quantities.

Suyash: We all know the proliferation of mobiles. Compare fixed deposits to old phones and mutual funds to iPads and iPhones. When there is a customer need, the same customer adapts, right? So, the key is that it is not about simple or not simple or complicated, etc. At the end of the day, we have to put in more effort in creating that need, which is where distribution plays an important role. It will go a long way in simplifying products.

Investors have lost confidence due to high volatility. How can it be tackled?

Shah: Sometimes if you remain invested, some of the funds may or may not make returns in this kind of environment. We cannot be always complaining about volatility, we have to make volatility our friend. In fact, a series of funds have been created with play on the volatility which the industry is promoting in a big way. If you see the five-year returns of large- and mid-cap funds, a lot of players have been able to beat the benchmark returns. About 76 per cent of the (equity) AUMs was beating the benchmark. The players are actually doing a good job of what they have been paid to do. And if the situation has been volatile, we need to see whether they are coming up with products which gain advantage out of volatility.

What would like to tell the retail investors?

Barve: Stay invested in an asset class which has given performance over 7-10 years. I think we need to spend a little more active time in understanding where the market is. While we all try and make things simple, we have to accept that this is a product that needs engagement over a long period of time. Please spend quality time to a quality advisor and then make allocations which are for a minimum of five to seven years.

Balasubramanian: Stay focused on the end goal. That is the key for success.

Sikka: Two messages; one is for the mutual fund investors and the other is for those who haven't started investing. For the investors, the message is very clear that if your goals are for the long-term, don't look at short-term investments. Returns will come only in the long-term. So looking at returns of one or two years will only create more problems for you. And keep investing with asset managers who have long-term track record and have shown their performance in different market cycles. The other message for people who are not investing in mutual funds is that please stop investing in funds which are ponzi schemes or chit funds where you might be getting returns, but the principle amount itself is at risk. Stop investing with a fixation for assured returns from banks. In reality you are not getting anything. You are getting negative returns.

Suyash: Make time your friend. Start early as that's the way you get maximum time to build. Also, give time to your portfolio, review it regularly. Review your investments with a trusted advisor and make sure you take time to monitor your portfolio on a regular basis. But don't start switching out because then you don't have time on your side anymore.

Shah: All of us work hard for money. Let money also work hard for you. If that is to happen, one needs to spend more time in understanding where they are investing. A psychologist told me that more time was spent even in western countries on haggling for tomato prices than on buying a mutual fund. There is something beyond a past return also.

Chatterjee: Make friends with this animal called equity. Equity is seen as a monster. But you have to look at it closely and make friends with this monster. Invest in mutual funds which are easy, disciplined and organised way of investing in equities. Equity is not gambling.