How should we deal with the 5000 crore revenue loss?

Sundeep Sikka


Reliance Nippon Life Asset Management

  • Impact of recent regulatory changes is assessed by experts at a staggering Rs.5000 crore annual revenue loss for the industry – which has to be borne by distributors and fund houses
  • Sundeep believes that volumes will compensate for margin compression and that all stakeholders need to quickly realign business models to not only adjust for lower margins, but also harness higher volumes
  • RMF is extensively engaging with IFAs in multiple ways to help them make their business model transitions successfully
  • RMF’s retail focus has seen it growing in the retail space faster than industry – and plans are afoot to maintain this retail leadership position

WF: Some experts tell us that the total revenue loss for the industry as a result of the “Transparency in TER” circular and the reduction in TER effective April 19, will be to the tune of Rs. 5000 crores – which is over 20% of industry gross revenue. How do you think this loss will be shared between fund houses and distributors and what impact might this have on business?

Sundeep: We wouldn’t like to comment on the numbers, but would like to reiterate that we should not have a myopic view on the new TER norms. The new TER is a reality now and it’s important for all stake holders, including AMC and the industry to realign the business models accordingly to the new norms.

We agree with the regulators thought process of whatever is good for investor is good for the industry. We believe reduction in few basis points in TER will get more than compensated by increase in volumes in industry. We see the new SEBI norms as an opportunity to attract more customers to the mutual fund industry. The new norms work in the interest of customers and we all must work towards bringing more customers into the MF industry. In the last two years, retail assets under management (AUM) has doubled to over Rs 6 lakh crore, but the total number of unique investors is around 2 to 3 crore, which is miniscule to the overall investible population in the country. The mutual fund industry including distributors and advisors needs to look beyond expense ratio. In all we see the scope to grow, develop and transform the industry.

WF: B-30 towns and small IFAs across big and small cities are two key strengths in your distribution set-up. These are also seen as the most vulnerable to recent regulatory changes. What do you see as the road ahead for small IFAs and how do you propose to work with this core constituency to help them navigate through this challenging phase?

Sundeep: Reliance Mutual Fund has presence in 300 locations with 71,000 distributors across India, so distributors and advisors are an integral part of our mutual fund. Eighteen per cent of our total AUM comes from the B-30 town and cities. We believe rise in volumes will compensate for the loss. We have already started active engagement with our advisors and distributors including B-30 towns and cities. With small IFAs we are helping them with technology to cut down their operating expenses. We have revamped and relaunched our Reliance Business Easy app. We are handholding our small IFAs and holding training programs to educate them to sell goal-based solution to customers. We have been asking them to diversify their product mix and increase their investor base and advise customers to buy debt mutual funds, especially liquid and short-term funds to attract customers that are glued to bank fixed deposits. The effort has already started yielding results.

WF: 2018 was a tumultuous year for equity and debt markets, with the steep correction in mid and small caps in 1HY18 followed by the IL&FS event and its aftermath in 2HY18. What lessons must the fund industry and its distributors draw from 2018?

Sundeep: Last year was tough for both equity as well as the fixed income markets. But market corrections are common when it comes to investing into equities. Yet, equity as an asset class has delivered fantastic returns – we like to use the word wealth creation - in the long term. Distributors and investors should draw a lot of comfort from the long-term track record of capital markets and mutual funds. However, they should keep in mind that capital markets will go through bouts of volatility. Last year has just been the latest learning of what has been a historical truth. Distributors should set the right expectations for their investors upfront, take time to explain the nature of market and adequately explain the risks involved, while engaging with investors on the prospects of their investments.

WF: What is your business outlook for 2019 and what do you see as the key business drivers going forward?

Sundeep: We see a double-digit growth for the mutual fund industry in 2019. Increase in retail participation will continue to drive growth for the industry. In December 2018, despite volatility and outflow of money from FIIs, the industry saw a systematic investment plan (SIP) inflow of Rs 8,000 crore. In 2018, the retail investment in mutual fund industry rose by 15%, while Reliance Mutual Fund reported a surge by 17%. Retail segment has been a strong growth driver for Reliance Mutual Fund and this segment will continue to drive growth for us. Our retail AUM in the past two years has jumped from Rs 45,800 crore to Rs 83,000 crore.

The reversal in interest rates will also help drive growth in 2019 which will see money coming into debt mutual funds. Digital has been a key focus area for Reliance Mutual Fund and in 2019 we will see a rise in business from digital platforms including Paytm and Scripbox.

WF: How has 2018 been for Reliance MF? What have been the key hits and misses of the year gone by?

Sundeep: Last year has been good for Reliance Nippon Life Asset Management (RNAM). We have won two prestigious government mandates, the Rs 17,000 CPSE ETF and the employee state insurance (ESIC) mandate. Reliance Mutual Fund will be investing from the Rs 63,000 crore corpus of ESIC in the equity market.

WF: What plans are you making for 2019 on products, distribution and marketing?

Sundeep: At RNAM we are a full suite fund house with products across categories and different lines of business. We have a host of actively managed funds, have the largest number of ETFs, and have been expanding our offshore presence. Our focus for 2019 would be to promote our existing products, especially those products which will be most relevant in the context of the markets. We had been recommending large cap and hybrid equity funds in the recent past, due to the relatively better value propositions in those categories. With the recent corrections in the mid cap space, we believe distributors could start increasing their allocation to midcap funds, like Reliance Growth Fund. On the debt side, products offering relatively higher carry along with low duration could provide better returns than traditional fixed income investing. We would be focusing our efforts on such products, while keeping our options open to launch new funds, as and when appropriate.

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