‘MF sector to grow at 20% per annum for next 5 yrs’

There are enough inefficiencies that will provide fund managers the opportunity to generate alpha over the index, says N S VENKATESH, chief executive officer, Association of Mutual Funds in India (Amfi). In an interview with Ashley Coutinho, he says credit risk funds can be managed with an open-ended structure, provided the risks are clearly communicated to investors. Edited excerpts:

The last six months have seen outflows from equity-oriented schemes. Do you expect this to continue?

The markets have been hitting new highs and mutual fund returns are positive after a long time. So, investors are using the opportunity to book profits, a trend that looks likely to continue in the near term. The SIPS (systematic investment plans) are still stable, however, and we are seeing SIPS of over ~7,500 crore every month. Over 90 per cent of this money goes to equity schemes. The Budget will provide the next major cue for market direction.

Defaults and downgrades in the past two years have hit debt schemes hard. Is the worst behind?

Inflows into debt schemes have stabilised and gained traction in the last couple of months. One of the key lessons from the Franklin Templeton and IL&FS episodes has been that debt funds should necessarily be more liquid so that they can meet sudden redemption pressures. The regulator has been proactive and taken a few corrective measures in this regard. For instance, it has put out guidelines that mandate debt schemes to set aside 10 per cent of their corpus in liquid assets. Recent guidelines with regard to the fair conduct and best practices for dealers and fund managers will also help improve transparency in the way securities are purchased. The industry has been talking about the complexities of investing in debt funds. Maybe we can do a little more in educating investors about the risks involved.

Quite a few passive Etfs/index funds have been launched recently. Is the time right for the transition to passives?

Globally, the drift is towards passives. In India, passives are hardly 6-8 per cent of the total industry assets under management (AUM). There will be a gradual migration towards this category, led by institutional investors. We expect the contribution of passive schemes to increase to 15-16 per cent of total AUM over the next three years. At present, there are enough inefficiencies in the market that will provide fund managers the opportunity to generate alpha over the index.

The industry grew at a CAGR of 20-25 per cent between 2013 and 2018. Do you think that will slow?

We are a cyclical industry and there are periods of slowdown such as in 2008 and 2013. MFS enjoyed a good run between 2014 and 2018 and there are signs of a slowdown once more. Having said that, I think that the industry will clock a compound annual growth rate of 18-20 per cent over the next five years. MFS will gain currency as an asset allocation tool for investors. The industry’s efforts to spread financial literacy is also bearing fruit with new investors, including women, coming in every year. Growth of lower denomination SIPS of ~500 and less, as well as increased awareness in tier-5 and tier-6 cities will help widen reach. We expect AUM contribution from B30 (beyond top 30 cities) to increase to 22-23 per cent in the next five years (from the existing 16-17 per cent).

CEO, Association of Mutual Funds, India