CEO Speak

More investors will come in this year, despite market volatility

Kailash Kulkarni,CEO, L&T AMC

Kailash Kulkarni, Chief Executive, L&T Mutual Fund and the Vice Chairman of AMFI shared his thoughts about the fund house's performance as well as what the fiscal year could bring to the Indian mutual fund industry.

  • Market is being event led as opposed to being fundamentally led.
  • “India is on a strong wicket”
  • People will have to start living with greater amount of volatility. Volatile times are in fact best for SIP investors.
  • Expects the industry to add more number of customers this fiscal year despite current cautious sentiment, as key enablers will be implemented this fiscal
  • Fiscal 2017-18 was one of the best for L&T Mutual Fund – a year which marked its entry into the “big league”.

WF: The optimism witnessed at the beginning of this calendar year is now giving way to caution as we get into the new fiscal year, with many concerns being expressed on global trade wars, on deteriorating Indian macros and on uncertainties over Indian elections. What is your outlook on equity and debt markets over the next 12-18 months?

Kailash: Let's just try to put it into perspective over one year. CY 17 was excellent for the Indian industry especially if you look at it from a calendar year perspective. It is very rare that you get a year that is so euphoric. We last saw that in the previous bull market.

This time, the communication that’s been happening is all about long term, SIP, and risks if any, are more global in nature than local. It is these global risks that have been playing out from February onwards. There have been some domestic events related to the elections and uncertainty about outcomes, but it has largely been the global factors that are far more prominent today.

One factor to keep in mind is that earnings growth has started to pick up. The last quarter saw a decent double digit growth. So is India on a strong wicket? I would think so. I am not unduly worried about the future of Indian markets if you are looking at it over the next few years. Near term events would obviously have a bearing on volatility and sentiment on the market. Clearly people will have to start living with greater amount of volatility.

One of the interesting aspects in this context is the fact that everything is event-led and not fundamentally driven. As such, markets rally when there is a good event and correct if an event points to uncertainty which could upset the election outcome in 2019.

Event led market movements should be of no consequence to a SIP investor, so long as there is confidence that the long term trend is up. Volatility is in fact the best time for SIPs. The greater the volatility, the better is the averaging in SIP compared to lump sum investment. You are actually getting the averaging benefit which is what the SIP is supposed to do.

History has proven not once but multiple times that sitting on the sidelines has only ended up with people losing money rather than making money. What you have to look at is double digit return versus sitting on the sidelines that earns you 4%. For investors, there are no other investment avenues where they are confident of double digit returns over a 3-5 year horizon.

Coming to the fixed income side, with this new categorization of funds, fixed income falls very beautifully into two categories: parking money in the shorter term and the second being accrual strategies for investors with a three year plus time frame given the rising yield to maturity in the funds. With interest rates expected to remain flat with an upward bias, duration is perhaps not best suited for retail investors. Accrual funds continue to have the potential to beat FDs on a post tax basis.

Watch Kailash Kulkarni’s latest video briefing on the road ahead

WF: A key industry concern now is the nervousness among lakhs of new equity fund investors who are perhaps witnessing their first significant market correction, and the first occasion when their 1 year SIP returns are turning negative. What message would you want distributors to give to these investors at this juncture?

Kailash: At the risk of sounding politically incorrect, I have to say that it is much better to see this kind of volatility early on in your investment journey rather than later on. If you see 3-4 years of good returns, your expectations get firmly set – and then the shock of a volatile year becomes that much harder to digest. Seeing volatility early on prepares you much better to ride out such years which will always come in any market cycle.

Most of the new investors have come in through longer-term SIPs and with 10 years and above kind of horizons. It is up the distributors and all of us manufacturers to educate the customers that this volatility is only enhancing the number of units they get. From a longer term perspective, , it is going to be far better.

Nowadays, everybody does a lot of research. If someone had started investing in 2007 in SIP, how would their portfolio look in 2008, and then in 2012 and now in 2017? The answer lies in that data. One would have to engage with customers. The biggest mistake would be to stop engaging with them because the short term results don't look too good. Your engagement level would have to continue to be high.

WF: Will AMFI consider focusing its hugely successful “Mutual Funds Sahi Hai” education campaign to communicate with lakhs of new investors who have recently come into MFs, to help them build conviction that MFs indeed Sahi Hai?

Kailash: Phase 1 was just about awareness and now we will start talking specifics to help people. You will shortly see Phase 2 which is currently being worked out.

Separately, AMFI has launched the “Jan Nivesh” campaign along with the Times Group. This will be be a 100 city kind of on-ground initiative to promote and talk about the category and the dos and don'ts. It will be a far more granular kind of activity which will hopefully see far more traction.

WF: How has fiscal 2017-18 been for L&T MF? Would it be fair to say the year marked your entry into the “big league”?

Kailash: FY 2017-18 has been one of the best for the fund house. We have grown far higher than the industry with our growth more than double of the industry. What we are really pleased about is the kind of growth in terms of number of customers. The number of new distribution partners who started working with us based on the good fund performance we had, has more than doubled last fiscal.

We never really played for headlines. The way we built our fund house was through long term consistent fund performance and all that we would need to do to achieve it. We have always been a non-NFO player. If you look at our six years, we have just had five NFOs to essentially plug the gap in our product portfolio. We have stayed away from money gathering tactics like closed ended funds, we have consciously not chased hot money.

Big cheques can cut both ways – they boost your immediate numbers but can also hurt you on the way out. As long as the big cheque is long term, we are keen, but short term big money is something we have avoided.

In terms of distribution, we have focused equally on all channels. We never built an over-reliance on any one channel, we give attention to building all. Today, if you look at our top 3 ARNs who have contributed, cumulatively all 3 put together are not more than 15% of our entire book. So we don't have a dominance of any single partner.

SIP has been a great success story and today, we have upwards of Rs. 300 crore input value a month as compared to Rs. 85 crore at the start of the year. We have slowly built the foundations to grow the business very well.

In terms of net sales, we rank among the top 5 last fiscal on equity and equity oriented funds. This, we believe, is the result of a conscious effort to build a well balanced business model. Now, if that puts us in the “big league” as you say, we are very happy about it. But that’s not the focus within our team. Our increased emphasis is on building a sustainable business model. Talking of the “misses” as you call them, we perhaps could have done more and better in the online space. While we did launch Digital Dost, I believe we could have done more. We could have been more active in digital marketing as well. Another area for improvement for us is the shorter end of the fixed income space.

WF: What are your plans as you step into the new fiscal? What more and new can we expect from L&T MF?

Kailash: Given the surge in volumes we have seen in the last one year, strengthening our back office to cater to higher volumes is a focus area for us. Additionally, we would like to better cater to the new age distributors and investors who are using technology very actively.

WF: What are the big industry initiatives that you see gaining traction in the new fiscal and how should distributors leverage them to build stronger businesses and serve investors better?

Kailash: My gut is that this fiscal we will add more number of customers in this industry than the last. I will give you 3 critical reasons.

  • Implementation of C-KYC.
  • Implementation of e-mandates from NPCI.
  • Greater technology absorption among fund houses and distributors

CKYC refers to Central KYC (Know Your Customer), an initiative of the Government of India. It will replace the existing multiple KYC submission processes one needs to go through for various financial transactions such as opening bank account accounts, buying life insurance and investing in mutual funds. The government has authorized CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India), to manage the Central KYC Registry (CKYCR).

National Payments Corporation of India (NPCI) is the regulatory body constituted by the Government of India to oversee all Retails payments in India.
A mandate is a standard instruction that you provide to your bank or other institutions like your phone service provider to automatically debit the instructed amount from your bank account. The existing mandate process is manual and can take 7-14 business days or more.
The e-mandate system facilitates issuance and confirmation of mandate by the customers through alternate channels to paper based mandate. All banks in India who are members of any payment system / channel approved by Reserve Bank of India will be allowed to participate in the e-mandate process of NACH.

The first 2 deal with the biggest stumbling blocks for onboarding new customers in this industry. e-mandate is a mandate registration for auto debits and that takes a lot of time since it is done manually. A lot of people have started doing it directly with banks but NPCI is doing it across all banks. Suddenly you will have 40 -50 - 100 banks who will be part of this ecosystem. So mandate registration will take 1-2 days from what possibly takes anything between one week to a month now.

Technology will play a big role with more number of platforms coming in. Some digital wallets are starting to come in and if you make mutual fund buying as easy as buying stuff on your e-commerce sites, then why can't someone in a small town buy a SIP? It becomes that easy for him.

These are the changes that will be in effect this year and once implemented, it would be just a hockey stick curve when it comes to getting more investors. This would be given the fact that all the stumbling blocks or so called pain points this industry has had will be wiped out. That’s the big game changer you will see and all this discussion of direct and non-direct will become history.

There will be so much choice available to customers that unless you add value to your customer’s lives, they will go to the person who adds that value to their lives. Somewhere down the line, there will be a set of customers who would want that 1 to 1 engagement while another set of customers will be happy with a limited 1 to 1 engagement including online engagement.

WF: With SEBI signalling a clear intention to segregate advice and distribution, how do you see intermediation models developing in the HNI and retail segments going forward?

Kailash: Both models will continue to exist in India because there is an audience that only needs advice and are willing to pay for it. Unfortunately, that audience is limited today. With product suitability responsibilities remaining with MFDs, many distributors may continue with the MFD model.

As regards the issue of distributors who currently are operating the “hybrid” model, I suppose we will have to await the final regulations to know how that will play out. Representations have been made on hybrids as well as on the merits of allowing different people within families to pursue MFD and RIA models. We have to see how these deliberations pan out.

Disclaimer: This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. This document provides general information on performance; financial planning and/or comparisons made are only for illustration purposes. The data/information used/disclosed in this document is only for information purposes and not guaranteeing / indicating any returns. This material provides general information and comparisons made (if any) are only for illustration purposes. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing. Recipient of this document should understand that statements made herein regarding future prospects may not be realized. Recipient should also understand that any reference to the indices/ sectors/ securities/ schemes etc. in the document is only for illustration purpose and should not be considered as recommendation(s) from the author or L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates. Recipient of this information should understand that statements made herein regarding future prospects may or may not be realized or achieved. Neither this document nor the units of L&T Mutual Fund have been registered in any jurisdiction except India. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

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