The bull market is in its full bloom and you have been silent!
Many times, it is good to see the bull market from far away. It has been one of the most satisfying 12 months. Exactly last year same time, we were in the worst period when the Nifty was 7500 and today as we talk, things are at an all-time high!
FII flows are at a record high, retail participation is at record high and the number of demat accounts opened in the last one year is about one crore. But inflows into mutual funds’ equity schemes, keeping the SIP picture aside, have not been very resilient. Why is that?
These are very unusual situations. The market is at all time high and the demat accounts openings are also at an all-time high. But one needs to slice the onion and see the data a little differently. In 2013, when we saw a bull run, investors were redeeming and we saw the longest stretch of nine months back to back outflow.
Somehow this time, while on one side we see the outflow, the quality of the industry and the investors is improving. While we clearly see a lot of outflows, as an industry, during the last 12 months, we have added about 70 lakh new investors. The SIP flows continue to be high but more importantly, the new SIP registrations continue to be high. The trend that we are seeing is very interesting. The HNI segment has been regularly redeeming as the markets go up. When the markets go up so sharply — almost doubling from the bottom — investors usually are seen redeeming and booking profits but there is also a very interesting trend. This is the best time for India where we are seeing consolidation of capital. Strong foundation for the capital markets is getting built. We are seeing one crore new demat account holders, 70 lakh new investors coming into the mutual fund industry.
We need more household savings coming into the capital markets and we are just getting ready for that. I personally believe we should not just see the top line number of the outflows. From the quality point of view, we are in a far stronger position than we were ever before.
How much of the current outflows into mutual funds could be because of a) a strategic call by funds to raise cash because markets are at an all-time high and b)repositioning of the balanced funds which had invested into equities at the same time last year when markets were low?
It is a mix of both. The last 12 months have also taught professional portfolio managers that they have to be always ready for anything to happen. Nobody expected the sharp correction that we saw and today as the markets are going up, fund managers have also been building a little cash position. So , two trends have emerged clearly. Advisors and investors have been booking profit. But a third trend which has caught up in this period was that a lot of money has been moving out of large cap funds and coming into ETFs. So effectively investors are getting mature.
If we were to divide investors in two categories: The savvy investors, who are taking calls, are moving into ETFs; and then there are the retail investors. Also new plans are getting added to the industry. I remain very excited. I think we are building a very strong foundation for the industry as well as for the Indian capital markets.
These are terrible times for debt investors because of the decline in interest rates. Now that is changing again!
Our industry is always very exciting. Things are going good in equity and in the last three months, we have seen the 10-year going up by 30 bps from 5.90%. Investors have seen negative returns in fixed income but that is the reality, that is how the portfolios will always have the asset allocation has to be done.
The whole of last week I was seeing a very interesting trend. While the equity markets were negative when I looked at my own portfolio, it is only the international funds which are positive. So, portfolios will have to be created in a very even manner. One has to have a mix of everything — debt, equity and international funds. And also one thing that is emerging is investors do not panic the way they used to do earlier.
In the last three months, we have seen fixed income giving negative returns but investors take it in the stride because one is not investing for a period of three months only. So let me give you another example. Recently, during the Budget, we saw the voluntary provident fund getting taxed. We had a product a long time back in a wage structure with average maturity of about 20 years. Now all of a sudden, investors are coming into that fund because they see an opportunity to stay invested for a longer period of time. So I think investors are evolving and for us as asset managers the key lies in offering the right products and letting the investor make their choice.
The mutual fund landscape in India was brutally competitive. India is one country where domestic mutual funds have done much better than global mutual funds and Nippon Asset Management is the only exception to the rule. How did that happen?
The way we see it, while we are a multinational, Nippon is the world’s largest life insurance company but at heart, we are trying to run the business in a very Indian manner that is right for the Indian investors.
“Way back in 2016, as a plan to be future ready, we had identified that ETFs will become big in India. We have been proved right,”
At the same time, over the last 18 months, as we have gone through rebranding and relaunching, we are trying to get some of the best global practices in risk management from Nippon Life but are still continuing with what is right for the Indian investors.
Traditionally we were only a pure mutual fund play. Going forward, you will see us divide our business in four different verticals; on one side there will be mutual funds which are again divided between active and passive. Just to highlight the fact, one third of our equity assets are in passive now. On the other hand, we have already started building up our international offshore business.
Third is the venture capital funds, we have launched a digital venture capital fund in Japan and also two real estate funds in Japan. It is a very interesting business. From being a purely mutual fund play, we have become a true blue asset management company.
More and more companies or financial firms now want to start asset management businesses. What happens to this space given that only the top four or five players are making money. There could be entry of 4-5 tech dominated plays later this year.
At this point of time, only 2% of the population is investing in mutual funds. So we need more mutual fund players. In the US, there are 4,000 asset management companies. From our perspective, we see the new players helping to increase the base and going deep into the market. But again what is very important for every AMC to have its own strength. Somebody will be coming in digital. Somebody is going to be working only on ETFs. Somebody is going to be working for HNIs. A lot of new niche AMCs will come up. I believe digital is going to be the way forward for us. Even though we are a traditional asset management company, 52% of the business that we do right now is through digital. We have about 30 integrated APIs.
Over the years, when as an industry we were making SIPs popular, it used to take five days to convince investors to invest into a SIP. Right now, through our own digital properties, Nippon Properties every minute five new SIPs are signed up. Every minute on Google, 11 people are searching for Nippon Mutual Fund. Things are changing fast and today the only way to remain forward is to be agile. It is not digital versus physical. Both will co-exist and it is not only the new fintech companies, it is going to be the traditional companies like us who are converting itself into more a digital play that will also play very big role.
But more AMCs is good for the country. It gives investors more choice and it keeps everybody on their toes. AMCs are ultimately a volume game. It is very important for every AMC to understand that you need a minimum critical mass to remain viable. A lot of foreign AMCs could not do well in India because the critical mass could not be achieved. There is an operating leverage in this business.
Over the last 18 months, as we are going through rebranding our own mutual fund assets which had gonas low as Rs 1,80,000 crore. They are now over Rs 2,30,000 crore. The cost remains the same, operating leverage comes to play. This is a business of volume. And till the time an asset management company is not able to build up that volume, it remains loss making and that has been one of the reasons for a lot of exits from India.
From an AMC standpoint, how do you see the entire move from active to passive changing in this decade? What happens to the profitability of an AMC because you are not going to be making that much money in ETFs?
Way back in 2016, as a plan to be future ready, we had identified that ETFs will become big in India. If they had become big across the world, there was no reason why investors will not look at ETFs here too. I think our call was right. We are one of the largest — if you were to exclude the government allocation from EPFO to some of these management companies. We have 35% market share. We are 70% of the volume on the stock exchanges. Our job is basically to provide what is good for the investor. If the investor chooses to go towards an ETF, we see ourselves offering those products. Back in 2016, we realised if we do not do it, somebody else will.
Yes the profitability on the ETF is less, but again we do not run the business thinking what is more profitable for us. One has to keep the investor in the centre and think what is good for him. But if I was to flip this question the other way around, while the profitability is low, in absolute terms, we are about Rs 35,000 crores in ETF. Even a 10 bps adds about Rs 35 crore to the profitability. If we did not have this, we will not be having this Rs 35 crore of profitability.
Also, if we have an ETF, that does not mean our active fund is not important. We run these as two different business units – active and the passive co-exist in the company and will co-exist in the portfolio of the investors. I see the large cap funds will be the first ones to be challenged by ETFs. If you were to look at the top five large cap funds, two are ETF. So for us the idea is to be future ready. We do not want to put our profits ahead of the investor interest. But for the long term point of view, going back to the earlier question, AMC industry is a volume game. Today we have a blended yield of let say 52 bps. I will be happy even if the volume doubles. From Rs 2 lakh crore, we go to Rs 10 lakh crore and even if the basis point goes down by 5 bps, it does not matter.
