Rajesh Iyer, CEO of DHFL Pramerica Mutual Fund, shares his industry perspectives in an exclusive interaction. Excerpts:
As you have worked in the wealth management space, how is the retail approach to investing different from that for HNIs? HNIs are believed to prioritise capital protection, while retail investors are all about wealth creation.
For HNIs, you are looking at very large corpusses. So, what wealth managers do is to create a safety pocket. Of ₹100 crore assets, technically, you do not need more than ₹20-40 crore depending on how you are living . This money has to be capital protected. Many HNIs and UHNIs used to look at tax-free bonds for that purpose. This is the money where they do not want to take any risk whatsoever and are okay with lower returns. But for the remaining portfolio, the objective could be wealth creation.
What are your plans for DHFL Pramerica AMC?
We aim to go beyond simply managing money and would like to be the trusted solutions provider for any stated or dormant requirements of investors while delighting them with our services. As a joint venture between two trusted financial groups from two very different geographies, we are going to bring in the global investment solutions expertise of Prudential Financial Inc, USA, and penetrate deep into underserved markets in India by tapping into the multi-decade experience of the DHFL group. We are looking at bringing in innovative solutions across asset classes with differentiated investment strategies.
In the recent market correction, there has been a lot of bloodshed in small- and mid-caps. What’s your take on this?
The market has evolved compared to two decades ago. We have had earning challenges and yet we have had a good flow of money on the domestic side. Valuations had moved into stiffer territory over the last few quarters. Then there are macro triggers such as crude oil, interest rates and political risks. All of these have weighed on mid-cap stocks.
The SEBI recategorisation has also had an effect on this segment. But in my view, these are cyclical factors. The broader theme is that there are more earnings upgrades than downgrades now. Actual earnings may now be closer to estimates and that’s positive from a long-term perspective.
What are your observations observing in terms of investor behaviour?
The IFA community has grown a lot in recent years. Most of the advisers are armed with knowledge. As we are all seeing potential political risks, advisers are aligning their investors towards doing SIPs, rather than one-time investments. So, I don’t think optimism has gone out of this asset class.
There is cautious optimism. People are not stopping their SIPs because there are few alternatives to MFs with comparable returns. So, flows still continue, albeit with some slowdown.
We have seen that a lot of flows have come into the fund industry at peak valuations. The industry has shied away from cash calls. But wealth managers and PMS schemes do take those calls.
In my view, that is not a correct philosophy. That’s like taking trading calls. There are other ways to manage risk. You can buy put options. You can migrate to higher quality and higher market-cap in equities. But I do not see drastic cash calls being taken. Ultimately from an investor’s point of view, equity is a derived value.
The investor has a financial plan, he has a debt allocation and then sets aside money for equity. Equity investing requires three-five years of time to pay off. When you have such a view, then it is best to use tactical underweight and overweight positions to manage the time factor, rather than taking cash calls.
Will passive investing take off in India?
I am a firm believer that ETFs are still sometime away. Indian markets still have considerable alpha to offer. It is just that funds and sizes have to be structured in a manner that they are able to benefit from the opportunities. I believe that there are inefficiencies in the market which will continue. It might look as if prospects for active investing are dull right now, I believe the story is intact.
There is a lot of debate on reducing mutual fund expense ratios. Due to the slab structure, smaller the AMCs, usually higher the expense ratios. Will you find it hard to comply?
More than 90 per cent of our assets are well below the regulatory total expense ratio (TER) limits. So, we are well positioned to manage any additional TER restrictions from SEBI. Broadly speaking, reduction in TER will impact the industry’s ability to incentivise distributors. So, this will be an issue for the smaller funds. This means, you will have to lower ability to spend on market and investor outreach. It also means that digital is something one needs to look at.