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I Expect 2002 to Mark the Beginning of a Shakeout

Nikhil Johri, CEO, Alliance Capital believes that the way fund industry is growing, there is not enough room for all the 35 to 40 AMCs to co-exist and certain AMCs managing small sums of money will not find their existence profitable

Alliance Capital has emerged as a complete fund family since it flagged its operations in 1995. Today, it offers a full range of debt, equity and balanced funds. Besides these core offerings, it has a wide range of sector equity funds and series of fixed income term-plans. Alliance Capital was also the first to launch an open-end Monthly Income Plan, which lead to emergence of a new fund category. Mr. Nikhil Johri, Chief Executive, Alliance Capital India gives his candid views on a wide range of issues concerning the industry and his funds.

On the lesson of 2000-2001 for the fund industry
One of the important challenges for the fund industry is that in bullish markets the emphasis on financial planning and asset allocation principle is diluted. This results into investors with inappropriate profile investing in the funds. For example, many pensioners invested in the technology fund during the boom period in March 2000. To avoid such wrong profiling, mutual funds should insist distributors' sales staff be sufficiently trained to do the selling, particularly of equity funds.

On likelihood of a shakeout in the fund industry with M&As leading to consolidation
I expect that in 2002, there will be a beginning of a shakeout in the mutual fund industry as certain asset management companies managing small sums of money will not find profitable to continue in existence. With the way the industry is growing, there is not enough room for all the 35 to 40 AMCs to co-exist.

On the idea to offer an investor protection fund to instill confidence in equity fund investors
It is a good idea to offer an investor protection fund to instill confidence in equity investors. However, the implementation of this needs to be carefully managed.

On benefits of derivatives for mutual funds. How active has been Alliance's participation?
While there are both risks and rewards associated with derivative transactions, we have not been active in participating in this market through our equity funds. Normally the funds that undertake derivative transactions are specialised funds, none of which are offered to investors in India. However, on the debt market side, we have undertaken some transactions in interest rates swaps in our income funds.

On the need to launch a bond option in Alliance MIP when MIPs essentially have an equity component
It is not mandatory that MIPs necessarily have an equity component. The equity component makes returns from such a fund very volatile and hence investors, who expect a consistent dividend at the end of every month, do not prefer such funds. It is only for such investors that we are introducing a bond option in which the returns are not expected to be very volatile.

On the likely exposure to equities in Alliance MIP in bullish and bearish times and ideal time frame for an investor in Alliance MIP
During the existence of our MIP scheme, we have kept the range of equity investment between 3% to 10% approx. The ideal timeframe for an investor is approximately three years.

On investment strategy for MIP's bond option. Will the plan be managed any differently from Alliance Income Fund (AIF)?
The MIP bond option will differ from Alliance Income Fund (AIF) mainly with respect to the additional exposure to liquid government securities in MIP and it is essential to realise profits before declaring dividend. The portfolio duration of Alliance MIP bond option will be very similar to AIF.

On whether gilt funds will emerge as a staple bond product for long-term investors, given that investments are free of credit risk and returns are very close to the underlying value of assetsGilt funds are unlikely to emerge as a staple bond product for long term investors in a scenario when income funds outperform the gilt funds. Moreover, since the average maturity of gilt funds is typically longer than the income funds, they carry a much higher volatility. If in extremely bullish interest rate scenario of 2000-01 gilt funds have been a fraction of income funds, then in a situation when interest rates are rising, gilt funds will not attract much investment interest.

On the impact of the slump in equity markets on collections in Alliance's equity funds The collection in Alliance's equity funds has also come down due to the impact of a slump in equity markets. As per the study done by us, there is a strong co-relation between subscription to Alliance's equity fund and the equity prices. In other words, over the last three years we have seen that maximum subscription happened when the stock market was at its peak i.e. in March & April 2000.

Alliance '95 backs its performance numbers with aggressive management, which has been clearly communicated to the investors. The performance not withstanding, Alliance has little to offer for a "typical" balanced investor who wants to strike the balance between equity and debt – conservatively. Your comments.
Yes, we do not offer a 50:50 balanced fund with equal balance between equity and debt.

On Alliance launching a specialised product like a pension fund or a child care fund We are contemplating launching a few specialised products and are currently testing them with distributors.