To a vast majority of intermediaries who often perceive their interests to be at odds with those of their customers, the story of NJ India Invest, the country's largest mutual fund distributor, should come as an inspiration. Its founders and long-time friends, Neeraj Choksi (left in the photo) and Jignesh Desai (right in the photo), have exemplified that it's possible to be on investors' side and yet grow big, really big. From their humble beginnings at a time when nobody wanted to even talk about mutual funds, they have surpassed several milestones to build an unparalleled network of over 26,000 distribution partners managing over Rs 45,000 crore of investors' money. In a free-wheeling conversation with Value Research, the duo shared fascinating insights about their two-decade journey, the ongoing regulatory changes, the emerging threats and much more. Edited excerpts:
How did it all start?
Jignesh and I were roommates when we were studying in Vidyanagar. I was pursuing BBA while Jignesh bhai was studying engineering. My family business was into gold and silver while Jignesh had a construction business. But we didn't enjoy working there and wanted to do something of our own.
I completed my graduation at the time of the Harshad Mehta boom. I had interest in stocks, so one day I went to the Baroda Stock Exchange. One of my neighbours was a member there. That visit got me even more interested in stocks. So, both of us decided to work as equity brokers. We formed a partnership firm in June 1994. We took some capital from family and with that we bought a computer and capital-market software. I did the research while Jignesh bhai was more into sales. We faced a lot of problems with bad deliveries in those days and even had to borrow because of them at one point.
Coincidentally, mutual funds got privatised in India around the same time. Despite the bad experience from Morgan Stanley and Master Gain, we understood that mutual funds are a vehicle for retail investors. So, we started dealing in mutual funds, besides offering fixed deposits and car financing. We were just making the ends meet at that time. And then one day, we decided to stop stock-broking services and focus completely on mutual funds.
Did you also stop dealing in fixed deposits and car financing?
No, we continued with them but not in a high capacity. Later we realised that fixed deposits were risky, too. They used to offer 15 per cent interest at that time as well as 15 per cent as commission to us. That didn't make sense to us, so we stopped offering them, just to be sure about investors' safety. Later, NBFCs did face a lot of problems but we were out of them by then.
Then in 1997 came the IPO of ITC Threadneedle's Top 200 Fund (now HDFC Top 100 Fund) and we decided to market it. We called a meeting of 100-150 people and gave a presentation but managed to get only three applications for Rs 13,000. At that time, no one believed in mutual funds. But we liked their concept. We wanted to reach the AUM of Rs 100 crore as we thought that once we reach there, we would have sufficient trail income to meet our expenses. We eventually achieved it in 2001.
Did you have any advisors until then?
No, there were no advisors until then. It was completely our business. We had started one office in Mumbai and we had also opened some offices in Gujarat in 1999 and 2000, and those were decent years for us in terms of business. At that time, we used to make valuation reports on Excel and send them to our clients. Then the internet came in 2000 and we thought that if the client was able to access all his reports online, it would be really nice. So, we found a company to build a website for us and our customers really enjoyed it. The person who developed the website is now the head of our IT team.
We wanted to sell SIPs to each and every home but we realised that it is not possible for us to keep so many employees. So, we thought why not create a network of distributors and empower them with our online resources. That's when the network came into existence, in 2003.
For some time, both the direct business and network co-existed but then we closed our direct business to focus completely on the network.
Why did you shut the direct business?
We didn't want any conflict of interest with the network of advisors. But we were very clear that we wanted to work only with serious people. So, we kept two conditions for them to ensure quality. One was to clear the AMFI exam and the other was to deposit a fee of Rs 1,500.
A lot of people were sceptical. They said why anyone would pay Rs 1,500 when others allowed them to join without any fee and they don't even keep the exam mandatory. But my view was that if a person can't commit to clear an exam or invest Rs 1,500 for his business, how would he be able to continue? So, we decided to keep those conditions, even if it meant working with a small number of people. But we didn't face any problem on this front. We were in a sweet spot between 2003 and 2008. Every year, we increased the number of offices by 15.
What are the main tasks done in office?
Primarily sales. We have a unit-manager concept. His role is to recruit, train and develop sub-distributors. Initially, we used to go to the insurance agents outside the LIC office and explain them the business opportunity. Then we used to train them for the AMFI exam. And then we used to make them join us as a partner. Even after that, the unit manager used to do joint calls. By doing so our network grew. Then we started providing co-branded materials, newsletters, visiting cards to the distributor partners.
In 2003, we had an AUM of Rs 300 crore. By 2008, we reached Rs 10,000 crore. Then in 2010, we became the members of the stock exchange.
Are all your transactions done through the exchange?
All our transactions are now through the exchange. Today, we can do inter-AMC switch without a financial transaction.
Suppose the customer has to shift from Fund X to Fund Y. He won't have to do any financial transaction from his account. He just needs to give one mandate for SIPs, even if there are five funds. And all this is available online. He can do it through the mobile app, on his computer or even over a phone call. We are the first one to tie up with NPCI for the e-mandate.
We get SIPs done for perpetual duration. We have never sold SIPs of small duration. At the time, when transactions were done through physical forms, we got them specially designed with only three options for SIP duration - five years, 10 years and 15 years. Perpetual SIPs were not there at that time. But we used to tell clients that they can be stopped anytime.
What are your views on the ban on upfront commissions?
There has been a debate on upfront commissions. We believe that trail commissions are a much better option. However, the problem with the ban on upfront commissions will be in projecting this profession as a viable career option for newcomers. Upfront commissions are very supportive for new people joining this profession. If someone doesn't get even Rs 15,000-20,000 per month to start with while he is settling down, he will quit. The cyclical nature of the market doesn't help either. For newcomers in this profession, a small upfront commission is desirable as it will make them continue.
What about the increasing industry focus on cost, especially after the new regulations?
The margins will decrease. Whether SEBI's decision to pass on the benefit of scale to the customer was right or not, we are not getting into that debate. But obviously because of that your margins are going to decrease. You will have to do larger volumes to compensate for that.
In most businesses, this is done by the market itself. Look at telecom. The call rate has declined from Rs 16 to one paisa per second. Brokerages in stock trading used to be about 2.5 per cent. They have now come down to Rs 20 flat.
How much do you worry about direct plans?
Not at all, because quality is not free. You need to be confident that you make a difference to your client's life and for that you should get a little amount of money. If, as a customer, you don't want to give that, then we reject you as a client. Our customers used to earn 6-8 per cent; we brought their returns up to 13-14 per cent. That makes them happy. If they are with us, we will ensure that they create wealth. We will not let them make irrational decisions.
There will always be two-three people out of 100 who make a fuss about direct plans. The other 97 choose to stay with us, even if they know everything about direct plans. But the problem is that when those three make noise, people seem to believe that everyone is saying so. But it's a myth. In fact, we tell advisors to tell the client upfront about direct plans and explain the difference. It is better that we only tell them instead of someone else telling them.
Direct plans on Paytm Money are in the news. Apparently, around 10 lakh people registered their phone numbers and Paytm Money has been able to on-board 30,000 customers, out of whom 15,000 are those who have never invested in mutual funds before. How do you view this?
It is an opportunity for us because the customer will realise the difference. Here the advisor goes to his house and has a relation with his whole family. And our advisors are mostly local. So, they build a different relationship based on trust. This business runs on trust. Platforms like Paytm Money might be able to get more in liquid funds and similar categories because of convenience and ease of operation. But in equity, where to invest and which fund to choose are not that easy to do simply on the basis of an algorithm. You need a fair level of knowledge for that. As of now, many customers don't even know the difference between an SIP and a mutual fund.
Look at it this way - much medicinal information is available on the internet but that doesn't mean we stop going to the doctor. Ultimately, the conviction of your advisor is very important.
What's your view on robo advisors? Do you see them as a threat?
The role of an advisor is that of behaviour management, nothing else. We ask our partners to simply tell their customers to stay calm and keep investing as equity gives returns in long term. That is what we are paid for. We are not paid for any intelligence. People are way more intelligent than us. But they still need a behavioural coach. We just bring discipline to their investments. This is also the reason why we strongly feel that no robo advisory can take IFAs' business. If you have made a good platform and provided convenient payment options, everyone would prefer an individual over a robot. The personal touch is very critical. In all other businesses, there are job cuts because of artificial intelligence. But in our business, employment opportunity is very big. Even if the number of advisors increases to 20 lakh tomorrow, everyone will get business.
How big is the problem of distribution partners moving out of the network?
AMCs often contact distribution partners and motivate them to join them by saying that they will get higher commission in comparison to NJ. But at the end of the day we are very clear that if they come with us, their productivity will increase. They might get more from AMCs in percentage terms but our numbers speak for us.
We did a comparison of top 1,000 NJ IFAs with the top 1,000 outside IFAs. The data were for five years. The AUM of our IFAs grew by 28 per cent while that of others grew by 14 per cent.
We measure the performance of our IFAs in terms of net sales. If someone simply churns from one scheme to another, that is not counted.
What is the scale of the business of your oldest and most successful sub-broker?
He has reached around Rs 1,000 crore. And there are 42 who have AUM of more than Rs 100 crore.
Do you provide market leads to your distributor partners?
Yes, we do. We have a team for social-media marketing. It runs campaigns for distributor partners in their names and within their budgets. Whatever leads are generated are forwarded to our distribution partners.
Suppose a partner is looking to target a particular kind of audience in a particular area. We will run campaigns on Facebook and Google for him and forward the leads that we generate to him.
It must be a big service...
Yes, but we charge nominally for it. In fact, all our marketing effort is paid for by distributor partners but the charges are nominal. Making money is not the objective of these services. They are business-support services. We just recover our cost and ensure that the distributor's business grows.
We have created websites for almost all of our distributors. We have a content-management system with 15-20 models. Distributors can choose any one of them and an automated website is created. We also register the domain. Everything is done by us but to the customer it appears to be the website of the distributor partner. The customer can also check his investment values directly on the distributor partner's website.
What is the number of AMCs whose funds you sell?
As a network, we are empanelled with all of them. But we closely work with 11 AMCs. Our network has all big, medium and small AMCs. We look at the qualitative aspect, our comfort and also how they are helping us in developing the market. This is very important because ultimately we have to spread awareness.