The AUM growth of your fund house declined marginally over the last one year. How would you ensure your fund house regains its growth momentum?
The recent dip in AUM is more of an aberration. While our sales increased, AUM slipped due to market correction.
First, our AUM is heavily tilted towards the mid and small cap space (70% of our assets are in equities of which 67% is invested in mid, small and micro cap stocks). In the last one year, mid and small caps have corrected sharply affecting our AUM. Second, post the IL&FS default many institutional investors moved their money to the top five fund houses looking for safety despite the fact that our portfolios did not see any write-offs.
Our strategy going forward is to build strong performance in large cap and balanced categories and cross-sell our existing clients. We are trying to diversify our equity portfolio, as the mid and small caps are comparatively more volatile. Having assets across the equity basket will limit the impact of market volatility on our AUM.
On the debt side, we will be pitching the cleanness of our portfolio to institutional clients citing the ‘no write offs’ as a testimony to our high quality investments.
Since the commission structure and incentives of distributors are more or less similar across fund houses, how will you ensure that you continue to get good business from your top distributors?
More than 40% of the distributors were following all-trail commission even before it was implemented. So we haven't seen any major drop in business after the SEBI announcement. In fact, we have a more level playing field now. Secondly, with the exception of our mid and small cap fund, majority of our funds in other categories are smaller in size. Hence, we are in a position to offer marginally better pricing. That, backed with good performance, will help us get good business from distributors.
Experts believe that the ban in upfront commission may discourage new entrants to the distribution business and shift the focus of existing distributors to other products. What is your view on this?
Generally, in any business there is an investment phase, where you put in capital but do not see much returns. In our industry upfront commissions used to take care of the client acquisition cost. With the upfront commission ban, advisors will increasingly adopt technology to lower costs.
In the near term, the ban is likely to affect the addition of small ticket clients and entry of new distributors in the business. While the situation may stabilise over a period, the rate at which new distributors entered the business is likely to fall.
In your opinion, how can distributors grow their business in an all-trail era?
Instead of restricting themselves to mutual funds, advisors should expand their product offerings to gain a bigger wallet share from their clients. Over a period, they should aim to be the one-stop shop or the financial supermarket for their clients. Overall, the focus should be on increasing the value of the pie.
SEBI has been pushing fund houses to promote direct plans among investors. How do you plan to promote direct plans and align interests of distributors at the same time?
We will use the 1 bps investor education fund to conduct investor education programmes. Investors we get through the IAP will be our direct clients. Depending on the response we get, we can decide whether we want to increase our investment in managing the direct channel. However, we have no intention of targeting our distributor’s clients and converting them to direct.
I believe the main job of our sales team is to manage and service distributor relationships and not to manage customer relationship because my sales team can advise direct clients only on our fund house’s schemes. However, at times, a competitor scheme may be performing better but the sales personnel will not be able to advise the client on any other AMC’s products. This restricts the investor’s choice. An advisor on the other hand has no such restrictions. While we will offer the best service to all our direct clients, our primary business model is distributor driven.
Where do you see the mutual fund industry five years from now?
I think at least on the equity side it can easily double in size. If we simply use the rule of 72, then the industry would need to grow at 14% per annum to double in five years. This seems quite plausible with the GDP growing around 7%-8% and inflation in the 3%-4% range. This takes the nominal GDP to around 12% and equities would need to grow at just 2% over nominal GDP to deliver this number. The numbers are however unpredictable on the debt side as retail investors are still recovering from the recent credit events.
