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 trend of expense ratios coming down is happening across the globe and is here to stay. It can be on account of regulatory action or competitive pressure. In an Indian context, the costs have not come down in the same proportion as its global peers. In fact, one could argue that the cost of compliance has gone up for AMCs in recent years. So, the only alternative for AMCs to keep a reasonable margin is to reduce transaction and distribution costs wherever possible. We have been making serious efforts to increase the share of digital transactions. In addition, in all other areas such as marketing, distributor engagement, customer service, etc., we shall be going for digital means wherever possible. However, in our view, the scope for the reduction of costs is limited except for the natural cost reduction that may come on account of economies of scale and that is built into the current expense-ratio structure prescribed by the regulator.
Many people these days take to equity investing by owning the stocks directly. Innovations like smallcase 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?
We are of the belief that the growth story of the mutual fund industry is very much intact. Competition from other product classes has always been there. Retail investors participating in equity markets during a bull run is also not new. However, mutual funds offer a very compelling value proposition in terms of professional management, high-quality regulation, diversification, no entry loads, low costs, liquidity, transparency, etc. Systematic investment plan (SIP) is one of the most popular routes to participate in mutual fund investments for long-term wealth creation. Investing directly in equities is fine so long as investors understand the risks involved in it. What happens in many cases is that retail investors enter the market lured by recent performance and start trading in shares based on tips and rumours. This is a recipe for disaster.
Rapid-fire questions:
- Investment guru/manager you admire the most: Vinay Paharia, CIO, Union AMC, for his process-driven and disciplined approach towards investment.
- Business leader you'd like to emulate: Ratan Tata for handling professional and personal life with such grace and dignity and guiding a behemoth such as the Tata Group into a new-age business group; for a person who has achieved so much to remain so humble is incredible.
- The most rewarding financial investment you've ever made: SIPs in mutual funds which have helped to fund the education of both my children.
- Money mantra you swear by: Don't invest in things that you don't understand.
- If not a money manager, you'd be: A teacher; I am still hopeful that I will get a chance.
This article was originally published on December 23, 2021.
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