In an interaction with Anil Mascarenhas of IIFL, Himanshu Vyapak says, “Investors should fundamentally increase their allocations towards equities. Mutual Funds may be the best proposition for investors to conveniently and effectively take exposure in equities.”
Give us an overview of how the mutual fund industry has evolved over the years.
The Mutual Fund industry assets have grown from about 1.5 lakh crore 10 years back to 13 lakh crore at present, translating to 23% growth over these years, which is a healthy growth. While the overall growth has been robust, the assets are also well-balanced. Today, the industry has about 4.5 lakh crore in equity, 6 lakh crore in debt and 2.5 lakh crore in liquid assets. What is even more heartening is the commitment of nearly 80 lakh systematic investments, totalling to annual inflows of Rs. 25,000 crore. Today, the industry is catering to the investment requirements of individuals, institutions, foreign investors and offers products suitable for various purposes, be it for long-term wealth creation, short term surplus management or pension.
Having said that, the current level of penetration is still low – at 4.25 Cr Folios, the Industry is serving just 3% of the population. This presents tremendous opportunity for the Industry and I believe we will see sustained strong growth in the MF Industry.
What are some of the new trends being witnessed as far as MF investments are concerned?
Digitalization is catching up in the way MF investments are being made. Increasingly investors are transacting online through websites or calling up the call centre by simply sending an SMS through the mobile apps in their smart phones. I believe digital platforms will re-define the way customer on-boarding and financial transactions are happening in India. We see that in future, a large number of customers from small towns doing online transactions as the internet penetration increasing rapidly and smart phones are becoming more and more affordable for the masses. This will be aided by the initiatives by Govt. Of India like “Digital India” which will make availability of high speed internet to nook and corners of India.
What is your current AUM and how many schemes does Reliance MF have at present?
We are the largest asset manager in India, in terms of AUM, managing over Rs. 2.5 Lakh Crs (US$ 39.1 billion) as on September 30, 2015, across mutual funds, pension funds, managed accounts and offshore funds. In terms of Mutual Funds alone, we manage Rs. 1.5 Lakh Crs and offer a range of products in different asset class and types of products – equity, fixed income, liquid, gold, hybrids, retirement, international and passive funds.
Comment on the performance of your funds. Tell us more about your recent launches.
We just completed 20 years of launching our first two schemes. These two funds that we had launched in 1995 – Reliance Growth Fund and Reliance Vision Fund – had done exceptionally well over these years. They have multiplied the original investments by 80 and 42 times respectively, generating a compounded return of 25% and 21%, significantly beating their benchmark, and creating wealth for our investors. Not only these two funds, but our other funds have done well too. We had instituted a study through CRISIL to compare our composite fund returns. According to the report, Rs. 1 Lakh invested in RMF equity schemes had grown to Rs. 19.86 Lakhs in the last 15 years, whereas it had grown to Rs. 5.56 Lakhs in Nifty and Rs. 9.08 Lakhs in the CRISIL-AMFI Equity Fund performance Index, which can be considered as Industry returns.
On the fixed income side, we manage over Rs. 1 Lakh Crs across various strategies. Here, our endeavour is to offer consistent returns aligned to the scheme objectives, and we have built a fairly good track record in our schemes over the years.
In the recent past, we had launched two international funds. One, Reliance Japan Equity Fund, which is Industry’s first Japan-focused fund, that could get benefited by the reforms undertaken in Japan, led by their Prime Minister. We had also launched a US Equity Fund, which would help our investors diversify their investments into a developed market. We had also recently launched a goal-oriented product, to address what could possibly be the most important life stage goals – retirement. Our fund is India’s first equity-oriented retirement fund, with several interesting features that could help investors in effectively meeting their objectives around retirement.
Which are the asset classes you are present in?
We are present almost in all categories that asset management companies are allowed to offer products in. Diversified equity funds, sector funds that focus on specific sectors like banking, pharma, etc., index funds, thematic funds like Dividend Opportunities, Consumption, etc., hybrid offerings like Balanced Funds and Monthly Income Plans, arbitrage funds, liquid funds, ultra short term funds, duration funds, gilt fund, corporate bond fund and a good range of ETFs are the various types of funds. Through the Portfolio Management Services, we offer Real Estate offerings and products under the AIF (Alternative Investment Fund) route.
What are the challenges & opportunities for the MF Industry?
I am very positive about the prospects of the MF Industry. I believe, the Industry assets will be at least 20 lakh crore in the next 3 years. The growth will be led by individual investors, whose participation will pick up significantly over the years. The challenge, from a business perspective, would be to set the right expectations for investors, communicate the track record & benefits effectively and to increase reach & penetration.
Are we in for a major bull run? The economy and the fiscal situation may still not really be out of the woods.
We have had significant improvement in the macro environment over the last couple of years. With oil prices having come down, along with various steps taken by the Government, inflation has come down significantly. Government’s fiscal condition is much stronger now – whether it’s fiscal deficit, current account deficit or the foreign exchange reserve. RBI has taken cognizance of the current economic situation, and has cut interest rates by 125 bps in the current year, with the latest cut of 50 bps in the September policy.
The improvement in the macro environment, steps taken by the Government to spur economic growth, the resultant hope for decent market returns and positive Real Rates are attracting investor interest, both in equities and fixed income. Further, with physical assets like gold, and real estate yielding poor returns, investors have been increasingly preferring financial assets. Domestic flows through mutual funds, particularly, have been strong, with the YTD flows being 9 bn USD, much higher than FPI flows.
I believe the fundamental strengths of our economy should lead to a robust market run in the years to come. Our view is that the earnings will rise about 2.5 times in the next five to six years and one can expect good double digit returns in the equity market.
What are some of the factors that make you confident?
In a World which is dearth of growth, India growing at above 7% makes it the fastest growing economy, amongst large and comparable countries. By virtue of being a developing country and lacking in several basic infrastructure, India ought to grow at a higher than average growth for a very long period, just to catch up. And, to facilitate such fast growth, we have a highly intent Government, which has outlined several high impact reforms, outlining significant spends over the years. Some of the developments like pension funds mandated to invest into equities should also help. Domestic flows, as such, have started picking up, and I believe the flows can be above 20 bn USD every year, complementing FII flows.
What are some of the interesting data points that convince you that allocation to equities through MFs can be made higher now?
The Mutual Fund Industry has a good track record. The Industry, on an average, has generated twice as much return as the index returns in the last 15 years, and has done fairly well across time frames. Just look at the CRISIL-AMFI Equity Performance Index and compare it with index to realize the extent of outperformance.
India’s household investments into equities is very low – estimated to be only at 2.7% of the total household wealth, whereas property is 58%, gold is 12.5% and bank deposits is 15%, despite the strong returns generated in equities: in the last 35 years, equity has returned 16%, while real estate return is about 13%, gold is 7.8% and deposits 8.3%.
Investors should fundamentally increase their allocations towards equities. Mutual Funds may be the best proposition for investors to conveniently and effectively take exposure in equities.
What is the investment philosophy of Reliance MF?
Our investment philosophy in equities is to attempt to create alpha and therefore, create significant wealth for our investors over a period of time, which is what we have managed to achieve in the past. On the fixed income side, our endeavour is to generate consistent and superior risk-adjusted returns in line with the scheme objectives. We lay a strong emphasis on internal research, processes and having robust policies & framework to sustain our track record.
Should first time investors dabble directly in stocks or stick to quality mutual funds?
Mutual Funds offer several benefits for a small cost. For small amount as less than Rs. 500, investors get to invest into a diversified set of stocks, the prospects of which have been carefully considered and evaluated by professional fund managers. I think the investment world is far more complicated for first time investors to dabble on their own. The best way to go about investing is to go with mutual funds.
Which are the sectors and stocks you are bullish and bearish on?
We are positive on Private Sector Banks, selective discretionary themes like auto, auto ancillary, equipment manufacturers and select companies within capital goods. We are also positive on cement and some large power companies. Most of these themes / sectors will benefit from economic growth, and would also get particular benefit from increased capacity utilization levels and lower interest rates. We are also constructive on Pharma and IT sectors. FMCG, Utilities, upstream petroleum are a few sectors we do not have much exposure at present.
Your view on interest rates and the currency? To what extent does it or should it impact mutual fund investments?
RBI had aggressively cut rates by 50 bps in the September policy, making the total cuts 125 bps in the calendar year. RBI’s tone was also dovish, given that the RBI clearly highlighted that it is looking for emerging room for more accommodation. We believe the RBI’s future actions are contingent on hi-frequency data on inflation as well as government’s proactive actions in field of food management, inflation, public investment and growth. As long as the government adheres to fiscal discipline and inflation pressures stay anchored, we believe there will be further space created over the next 6-9 months. We continue to expect 25-50 bps cut over next 6-9 months horizon as growth conditions will receive more focus in a low and stable inflation scenario. We expect the currency to be range bound, between 64 to 68, with a slight downward bias. The lower interest rate & stable currency regime is extremely positive for investments.
What needs to be done to increase MF fund investments by retail participants?
Lots, if I have to say it one word. Reaching out to potential investors, increasing awareness about mutual funds and facilitating investments would be the key areas. Retail business has been a focus area for us at Reliance Mutual Fund, and we had been taking a lot of initiatives & efforts to increase retail flows. In fact, we have a dedicated channel called Retail Business Development (RBD) in order to grow the retail business. We also have a dedicated training academy called ‘EDGE’, through which we impart training for our partners and conduct investor awareness programs across the country, particularly in small towns targeted at retail clients. We also take up promotional activities on specific categories to encourage long term investments. Recently, we had shared our perspectives on the importance of retirement planning through several media interactions to create awareness about, and spread the importance of, retirement. We will continue to take up such initiatives in the future.
What is your advice to retail investors?
Mutual Fund investments are subject to market risks is a standard disclaimer. A bigger risk to retail investor is actually not going ahead and investing, and in the process losing out on the opportunity to earn potentially higher returns. My advice to retail investors is simple: go ahead, choose a fund with a good track record, and stay invested for the longer term. You will not be disappointed.