Introducing Cafemutual

Nitin Rakesh, Managing Director & CEO of Motilal Oswal AMC, says that his firm will guide advisors on how to create portfolios using ETFs.

Today, awareness and knowledge of ETFs is low. How do you propose to overcome this challenge?

It’s a long-term process. You have to make some bets and we have made long-term bets. When distributors will charge for advisory, then low-cost ETFs will penetrate the market. In the US, in the current year to date, ETFs have seen net inflows. When returns go down, costs become important. If the market is giving you 4% return, then a 1% cost overhead versus a 50-basis points cost overhead makes a huge difference. Costs become important when return expectations go down.

Gold fund-of-funds became instantly popular among investors compared to gold ETFs which require demat accounts. Would you consider allowing SIPs through physical route to make ETFs popular among retail investors?

We are considering a gold fund-of-funds but haven’t crystalized anything yet. Our gold ETF is distinct because it allows you to redeem physical gold. We may lose that benefit and be one among the many if we launch a gold fund-of-funds.

Is lower commission payout a hindrance in penetration of ETFs?

Any product that has a low cost faces challenges in penetration. It will change as business models evolve. There are two ways to generate alpha. Traditionally, in markets like India, stock-picking is one way to generate alpha. More than 50% of active funds don’t generate alpha. Another way to generate alpha is through asset allocation. You would have not lost any money if you would have done 25% allocation to the NASDAQ-100 ETF in the last one year. The market will move more towards asset allocation and creation of model portfolios.

Since your NASDAQ ETF is doing well now, would you be looking at launching more ETFs with international exposure?

Yes, we are looking at it right now. We are waiting for S&P 500 ETF approval. Additionally, we will also look at other foreign indices which give investors the choice of international asset allocation.

You seem to have an advantage over your competitors because you have your own distribution network…

Yes, it has been very useful. We have more folios than any other ETF. We have around 40,000 plus folios. Our MOSt Shares M50 ETF and MOSt Shares M100 ETF have more than 10,000 investors each. We have done well despite being a new fund house compared to our competitors. Most of our investors are in the retail segment. We have virtually no institutional investors in our ETFs. We were in 600 cities and 1,500 branches the day we launched our first ETF. We had collected Rs 48 crore when we listed the NASDAQ-100 ETF and now we have got over 2,000 investors.

Most ETFs suffer from lack of liquidity. How do you make sure that there is enough trading of ETF units?

We can’t make sure that enough trading happens. But we can make sure that there are enough people offering two-way quotes. We have managed to offer liquidity in all of our products. There has never been a case where there is no quote or trade in the NASDAQ 100 ETF. During Akshaya Tritiya, even though our gold ETF was just a month old in the market, it was the fourth most actively traded ETF among 13 gold ETFs. The deliverable quantity was also good. You can appoint market makers and specialists only on a best-effort basis. You can’t incentivize them. So that becomes a bottleneck. There are no market-making firms in India. There are only arbitrageurs. We are working with around 10 to 12 market makers.

How are you planning to educate retail investors about the advantages of ETFs?

We will do it in two steps. Right now, we are focusing on educating distributors, brokers, private bankers and wealth managers. We have held ETF conclaves in the past.

Would you consider collaborating with some of the international ETF players like Vanguard and iShares?

We will consider it if it makes sense. We talk to international ETF players every day. We are still a young company. Once we have 10 to 12 products, then we’ll see if we need anybody to help us with distribution or product knowledge. We may go in for a product tie-up. So instead of managing international funds ourselves, we may bundle it with someone else’s product.

You have launched a debt fund, Motilal Oswal MOSt 10 Year Gilt. Given the current interest in fixed income, are you considering launching more debt ETFs or funds?

Our liquid fund is almost finalised. We will launch a short term debt fund and some international equity funds. We may also launch a fund with medium duration.

Internationally, investors have a wide variety of choice of ETFs across different asset classes. In India the interest is mainly centered around gold ETFs. Are there any challenges in getting approval to start ETFs tracking silver, crude or copper?

The commodities futures market is regulated by the Forward Markets Commission (FMC). FMC and SEBI have an agreement only on gold ETFs. I see no reason why people should invest in commodities when they have gold. Gold is an investment product. I don’t think any other commodity is an investment product. From an investment and portfolio-building point of view, maybe silver makes sense, but that’s it. We may launch silver ETFs, but nothing beyond that.

Will Motilal always focus on ETFs?

We already have one non-ETF product. We want to launch simple, transparent portfolios with minimum discretion to the fund manager. We believe that the power of asset allocation has to be with the advisor. Investors should know what they are buying. We will educate advisors on how to build portfolios through ETFs and index funds. People have to realize the advantages of low cost and transparent ETFs. Retail investors can’t buy a 10-year government securities product. Investors should use ETFs to access the parts of the markets which are inaccessible for them. They can invest in NASDAQ shares through our ETF which is otherwise not accessible to them. You can buy futures but the difference between futures and ETF is well known. One is a trading product and ETF is an investment product. Futures launched in India don’t give you dollar exposure because they are rupee denominated and are settled in dollars. If the dollar appreciates you don’t get the benefit from futures trading.  

How should retail investors invest in ETFs?

The best way to invest in ETFs is through SIPs because you can’t time the market. You can be lucky but not right.

What are your plans for the fund house for the next two years?

First, we need to complete our product portfolio and then build up scale. We will continue to innovate and differentiate ourselves. We grew our topline in FY12. The gestation period for break-even is five to seven years, but we will be in a better position than most of the new entrants. We incur less expenses to run our products. We can manage Rs 5,000 crore with the cost that it takes an active fund focused AMC to manage Rs 500 crore.