Jaideep Bhattacharya, recently appointed managing director of Baroda Pioneer Asset Management Company, believes that equities are the best way to beat inflation. According to him, the mutual fund industry needs to focus on goal-based selling to attract long-term money from retail investors. In an interview with Business Line , he spoke about the untapped potential in the non-metro areas and what the industry should do to make them mutual fund investors.
Considering where the markets are now, where should retail investors put their money?
I would advise them to invest depending on their risk appetite, which is best determined by a financial advisor. Retail is a very large canvas. Two different investors might have absolutely different (risk) appetites. I believe they should have exposure through the mutual funds because the governing standards are very high and it has products across requirements, right from gilt funds up to thematic and sector-specific funds. For first time investors, I would suggest that they first come into the fixed income through products such as fixed maturity plans, then go into hybrids such as monthly income plans where you have 15-20 per cent exposure in equities, then into diversified equity products and then into sector-specific funds.
How will the recently announced SEBI regulations help the industry?
I think the new SEBI regulations are a game-changer. What we have seen is that it has the right levels of incentive to the industry, to the distributor as well as to the investors. Today for an Indian - whether he is in Bharat or India - to be able to benefit from the capital markets, he needs to have access to the best products and services. Now, the number of unique mutual fund investors is just about two crores. We have done a disservice by not getting a large number of people to participate in the industry. Therefore, it is important to help them come into the markets.
The new SEBI regulations incentivise fund houses for going beyond the top 15 cities by letting them charge a higher expense ratio. But what sense does it make for the industry to go beyond the top fifteen cities when the top five or ten have not been fully exploited yet?
About 73 per cent of the industry’s assets come from the top 15 and about 93 per cent from the top 25. For any marketer, the question he asks is – what is the cost I incur for going beyond and what is the return that I get? That is the reason why most mutual funds have been restricted to the top 5-25 centres as they are restricted by the cost of setting up, the cost of distribution and so on. There is a large appetite waiting to be tapped into in the non-metros and we have to build capabilities to attract that into our fold. Most of these people invest in insurance, in gold, in land. But how many invest in mutual funds? It is not about their inability (to invest). It is our limitation in not being able to access that ability.
Also, a large number of these people have alternatives for investments and financial products. Today you get between 10 or 10.5 per cent in a bank deposit. Unless the other option is that much more attractive, why will the person move out of this stable return? The hurdle rate of an investor in equity markets would be a couple of hundred basis points over a bank deposit. Tax incentives are a big fillip as far as investments are concerned. In this regard, we feel that Rajiv Gandhi Equity Savings Schemes will be a big advantage to attract investors who are looking for tax incentives.
How do you convince these investors of the benefits in mutual funds?
Investor awareness. I believe India has opportunities in two spaces. One is “child” space because in India, a huge amount of importance is given to education. Cost of education will rise in the next ten years. So, people need to start saving for their children’s education. Second one is going to be pension. The “silver” club is going to get bigger. Unless we find a way by which they can start planning early, it is going to be a challenge for them to have the same standard of living. In a country where we don’t have a strong social security, where the medical costs are going to increase exponentially I think it is imperative that people start planning for their sunset years.
So as an industry, we have to move away from NAV-based selling to goal-based selling. NAVs will go up and down but goals will not change overnight. We as an industry need to move away from selling NAVs. That is why you see mutual funds have got stuck with short-term money – from one-day to three years.
What else in your opinion could the industry do to increase retail participation?
As far as investments are also concerned, we need to look at formats such as micro investments where a large number of people can participate because majority of the people are at the bottom of the pyramid. We need to have smaller formats so that the investors can first gain confidence and then move on to bigger formats. Today, we also need to have collective investment platforms by which you can reduce your cost to acquire.