‘Fundamental shift in the way people are saving’
Investments continue to flow into the mutual fund (MF) industry. This influx is not just limited to big mutual fund houses but niche MFs as well. One such niche player is Motilal Oswal that expects its growth to be around 20-25 per cent same as the MF ind
How much of the rise in mutual fund inflows in recent months can you link to the rally in equity markets?
Lots of times, people correlate domestic flows into mutual funds industry with a stock market rally. The fact is that neither can be driven by just one factor. There is a fundamental shift in the way people are saving. I have been involved in equities since 1999 but back then, there was no compelling reason to put money in mutual funds or equities. First, government schemes were compensating well in their returns, be it Relief Bonds or PPF. Beyond fixed income options, cash surplus generated would go into gold or real estate. Cash surpluses were substantial because tax assesses were very few.
Today, the reality is different. Recent economic measures and policies have induced a huge trust in tax compliance as well as in formalisation of saving. There is an overall decline in interest rates and inflation, which has reduced attraction of fixed- income instruments. We say that habits change with a generation, and that is now happening.
How does the domestic mutual fund industry view the selling seen from FIIs in recent months?
As of now we don’t see any issues from FII selling impacting the market. In 1991, market capitalisation was Rs 2 lakh crore with zero FII ownership. Today it is Rs 135 lakh crore, and FIIs own 25 per cent. The last three months have seen them sell USD 3 billion (around Rs 20,000 crore) out of their total holding of Rs 35- 40 lakh crore, hardly significant by their standards. Often their selling is for completely different reasons. In 2008 it was the Lehmann crisis, 2013 was the taper tantrum, 2015 was China, 2016 was Trump and this year was the increase in US interest rates. Regarding domestic factors, our GDP growth has slowed down. We believe the next quarter numbers will improve, and by March the bad phase will have been forgotten.
Which sectors is of interest to your company?
The financial sector looks interesting to many mutual fund houses including ours. We are personally inclined more towards the private bank and NBFC segments. In case of public sector banks, the Government is doing the right things through clean-up measures. In the past, short cuts were preferred— recapitalisation, ever greening and rollover of loans— to improve the NPA ratio. These did not address the core of the matter. This time it is different— it is repair measures. We had never till now heard of promoter selling his own property to repay banks. This change in approach is new and welcoming. While digital lending segment is getting lots of spotlight within the financial space, we believe that nothing intrinsically changes. Digital is just another platform for the same business. In the case of the power sector, we as such do not have any views or any holdings. The same is the case with infra sector.
We aim to search for, and invest in, businesses which have high quality, high growth and therefore visibility of high return on equity. They should not be leveraged, nor should businesses be too capital-intensive. Apart from financial services, we are holding substantial investments in auto and ancillaries, white goods, building materials and apparels. Sector-wise we are pretty secular. Even in terms of market capitalisation, beyond a basic filter, we are not very discriminatory.
How do you see the sector evolving and how do you rank yourself in that growth?
Our industry outlook is that the industry should see a 25 per cent growth on year-on-year basis over the next five years. In the context of the industry, we are a small player. We would have around Rs 30,000 crore across the mutual fund, the portfolio management services and the alternative fund. We believe we would participate well in the sector growth. In case of new measures, we do not believe a wallet would be a big thing for mutual funds. Wallets are largely driven by transactions, whereas investments like mutual funds are driven by different factors. For us, KYC matters are more impactful.
In terms of challenges to the sector, we don’t see too many. Firstly, the regulators are doing a fantastic job. The rise in tax compliance levels and drop in interest rates both will benefit the industry. For our personal growth, we are looking at channel partners to broaden our reach and geographical spread. This is important because the AMFI data shows that today 55-60 per cent of incremental inflows are beyond the top 15 locations, a distinct rise from the 50 per cent figure a decade ago. In non-metros, the savings potential now is rising and they are in need of awareness and options. We think the figure can easily cross 60 per cent in future.
Any competition expected from gold or equities?
Mutual funds, we believe are a vehicle to access asset classes – be it equity, debt, gold, real estate and so on. All asset classes have their own place. The underlying asset options are diverse and therefore we don’t believe that mutual funds are in competition with gold or equities. All the talk of such competition just boils down to investment preferences, and therefore not just financial return numbers. Preferences are driven by individual choices and scenarios. We discussed tax compliance and formalisation of saving, another change in scenario is the PAN card requirement for gold purchases above Rs 50,000 which has helped create a more level playing field.