WF: Retail participation in mutual funds has so far been restricted to only equity funds - and flows come in when markets are buoyant. The largest slice of retail savings continues to go into a variety of fixed income instruments - which the MF industry has not found a way of participating in as yet. What product and marketing options are you considering to address this large pool of savings that is eluding the industry?

KARAN DATTA: The statistics in terms of the size of the opportunity is staggering. The stock of fixed deposits in banks is Rs. 40 lakh crores. Compare that with the size of the MF industry - Rs. 8 lakh crores of which less than Rs. 3 lakh crores is retail money.

One of the things that the industry has done over the years successfully, is the fact that we have been able to get retail participation in equity funds. But the one thing that we have not been able to do successfully like you mentioned is retail participation in the other asset classes. Stability and predictability of returns for an investor and an appropriate remuneration structure for the distributor are perhaps where our industry's products in this space were weak.

So, what is changing in the landscape now?

The entire global downturn and coupled with regulatory changes that are starting to take shape change in India. I think both of them are acting as catalysts for the first time to see how important retail fixed income or retail hybrid products are going to become. Today these catalysts are only showing up in terms of new assets classes or at least emergence of the asset class such as hybrids and capital protection themes in the mutual fund industry. That trend had already got set in motion and I think both at an industry level as well as at Axis, we think that there is a huge potential in what we now term as retail fixed income. Having said that, it does not mean that focus on equity gets diluted. What we are really saying is that there is this real need for predictability or some form of stability and to overlook that may also not been correct.The idea is really to focus on need based products - products that identify the kind of outcomes that investors want and work towards delivering those outcomes. We've seen the emergence of capital protection products in our industry - we will see more of this in future. From a product construct perspective, the only deficiency is that liquidity gets compromised in the effort to provide predictability.

We've been trying to see how we can come up with products that are outcome oriented and needs based and also do not compromise on liquidity.

WF: What are some of the product ideas that you are likely to come up with, to address this investor need?

KARAN DATTA: We've filed a couple of offer documents with SEBI in the hybrids space - which are at this point of time, subject to approvals. One product is called the Axis Income Shield and the other is called the Axis Triple Advantage Fund. Both are new product ideas.

Triple Advantage will be a single fund with exposure to equities, fixed income and gold - all three asset classes in a single product. It will have around 35% to 40% in Fixed Income, 35% to 40% in equities and 20 to 25% Gold. The beauty of this product is that all three asset classes are held by Indian investors, in some form or the other. What we are trying to do is bring all of them in one convenient investment, thereby making it a friendly and simple way to own these asset classes. We think this product will work for retail investors as well as HNIs. Of course, as I mentioned, the product is currently with SEBI and is subject to their approvals.

If you notice, all three asset classes complement each other very well - act as natural hedges against each other - and are the three categories that most advisors suggest that investors hold in their portfolios. We are bringing in the layer of simplicity and convenience - so that it can be owned by practically any Indian investor - however big or small.

WF: And what is the Axis Income Shield product idea?

KARAN DATTA: Income Shield will have a debt-equity mix of 80-20 - although the offer document allows a maximum equity of upto 35%. Unlike the traditional MIP products in the market, Income Shield will work on volatility limits with an endeavour to cap maximum downside in any year at 5%. The upside that the equity exposure gives in a good market, will obviously be captured in Income Shield's equity allocation as well. We are trying to build in an element of predictability while retaining the open ended structure as well as allowing the fund to capture the upside of buoyant equity markets. While most funds in our industry focus on returns parameters, this fund will also place a lot of emphasis on volatility measures.

WF: Will it be reasonable to say that this fund will loosely work on principles similar to the CPPI models with an auto-rebalancing when trigger points are reached - and yet give an investor liquidity in the form of an open ended structure?

KARAN DATTA: Absolutely. We are looking at providing some form of predictability where the downside risks are capped, offer participation in the upside - and yet not compromise on liquidity. We hope to launch this product in April-May - subject to receiving necessary SEBI approvals.

WF: One challenge for your launch I suppose is the fact that while the distribution fraternity is comfortable with selling equity funds to retail investors, fixed income products and hybrids are not yet in their comfort zone.

KARAN DATTA: That's a very valid point. Fortunately one of the things that has started taking shape is the focus around MIPs and now the emergence of capital protection schemes. Distributors are beginning to sell hybrids and fixed income funds. We intend building on that momentum. But, you are right, we all need to revisit the pre 2003 era, where all of us learnt and became comfortable selling fixed income products and hybrid products.

The other aspect from a sales point of view is that we don't want to talk the language of the manufacturer. Let's step back and see what is happening : if you look at the investor - the client or the retail investor is least interested on the steepness of the yield curve. For him that is immaterial. Nor is he even keen to understand it. For him, what matters is whether the product that he has invested in, delivers the original mandate.

That is the stand that we are also taking so that we also end up talking the language of the consumer. Which is why, even if you look at the names of the product we kept - you will see that it focuses on the consumer benefit - Triple Advantage and Income Shield. We need to communicate these not as products - but as solutions.

WF: Finally Karan, how large do you see the retail hybrids and fixed income segment growing to over the next 3 years? Do you see hybrids and fixed income becoming as large as equity is today?

KARAN DATTA: Various projections for the growth of the MF industry suggest that over the next 5 years, the industry has the potential to grow from the present 8 lakh crores to as much as 25 lakh crores. Even after such a big move, we will still be much smaller than bank deposits - so there is no reason for us to believe that this growth cannot happen.

I would say that if we are to grow to 25 lakh crores, the retail space cannot remain only equity. I would imagine that 5 years from today, retail AuM will be more like 65% equity and 35% hybrids and fixed income.

WF: If we were to look at it from a distributor's point of view, over the next 3 years, distributors who give enough focus to hybrids and fixed income funds have an opportunity to double their MF AuM by just doing a good job on this initiative alone. After all, there is a lot of their clients' money that goes into bank FDs which they do not intermediate on at all. Will that be a fair assessment?

KARAN DATTA: Absolutely - that's very well summarized. The opportunity for all of us to achieve higher retail penetration is clearly there in the form of newer products that offer more stable and more predictable returns - because most investors are likely to have more money invested in stable avenues than in higher risk equity oriented avenues. As an industry, we need to make a concerted attempt to try and get our fair share in those allocations as well.

Also, a focus on hybrids and fixed income funds can open up a market of a whole set of investors who have never considered mutual funds before - because they only equate mutual funds with equity - and may not be comfortable with equity.