Revision of expense slabs by the regulator, the push towards passives, and the anticipated entry of several new AMCs translate into a greater focus on cost. Do you believe there is potential to drive the costs (expense ratios) down substantially from the current levels while still running the business profitably?
The regulator has defined the ceiling for the expense ratios, but the AMCs have been actively and dynamically managing the expense ratios on their own. Currently, in the industry, expense ratios are variable and can range from 0.06 bps to the highest level as permitted by the regulator, depending upon the fund characteristics. Even when the regulation permits, AMCs are not charging expenses to the highest level. The cost discovery happens dynamically in the market. Hence, I feel that AMCs are already working towards offering cost-efficient solutions and as far as the business profitability is concerned, it would be more a play of scale as mutual fund penetration in India is still significantly low.
How is the increasing proliferation of direct plans and the new age platforms changing the dynamics between the three key stakeholders - the investors, the distributors, and the manufacturers (AMCs)?
New-age digital platforms and a higher adoption of direct plans are increasing the bandwidth of mutual funds and bringing in more investors, which is healthy for the industry. For a majority of the Indian population, mutual funds and financial planning is an alien concept and these people need hand-holding at least initially. And this segment of investors will continue to come through the distribution channel. Hence, I believe while on one hand, the dynamics will keep evolving in the coming years, on the other, there is still enough room for all the stakeholders to grow.
The precipitous fall in interest rates has spelt big trouble for regular income seekers. Do you think the fund industry can better serve this investor segment and in a cost-effective manner? What's your big idea to solve the investors' income problem?
Mutual funds are market-linked and can offer better investment options as compared to traditional investments, more so in this low-interest-rate environment. For short-term investments, the option is arbitrage funds as against traditional investment products as the post-tax returns are better and these funds also offer liquidity. The investments in mutual funds must be looked at in totality to account for not just the returns but also the tax efficiency and liquidity that they offer. Opting for a regular income through a systematic withdrawal plan is what we believe is a tax-efficient solution to meet investors' need for regular income.
Many people these days take to equity investing by owning the stocks directly. Innovations like Small Case are further catalysing this trend. What implications do you see on the businesses of mutual funds? Can they pose a challenge to the growth story you would envision for the fund industry?
As discussed earlier, India is still highly underpenetrated in terms of financial products and there are significant opportunities for everyone to grow. Platforms such as smallcase are a tool to buy a bouquet of stocks but what is most essential is the research. Investors who have the knowledge and can do their own research about these companies can opt for direct equity investments. But such investors are a small part of the population. For a large part of the investor base, mutual funds that are managed by professional fund managers are still the most-suitable investment avenue. Hence, I do not foresee any growth challenges for the mutual fund industry.
Rapid-fire questions:
- Investment guru/manager you admire the most: The Oracle of Omaha - Warren Buffett
- Business leader you'd like to emulate: Jamsetji Tata and JRD Tata
- The most rewarding financial investment you've ever made: Select small-cap stocks
- Money mantra you swear by: Start early to experience the power of compounding
- If not a money manager, you'd be: A banker
This article was originally published on November 04, 2021.
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