The mutual fund industry has seen significant fall in redemption pressure in March. According to Nimesh Shah, MD and CEO, ICICI Prudential AMC, whenever the market corrects, MF redemptions decline. He says the relief is just a one-month phenomenon and has nothing to do with any sort of a fundamental change.
"It was a general pick up in sales that happened in March. Securities and Exchange Board of India (Sebi) has gone beyond 15 cities where distribution has increased. So there is a bit of excitement. The Rajiv Gandhi Equity Savings Scheme (RGESS) also played a key role in March," he said in an interview to CNBC-TV18.
Funds which have performed well over the last three to five years and are rated well by the various rating agencies are seeing good inflows, he said.
Below is the verbatim transcript of Nimesh Shah's interview on CNBC-TV18
Q: What is your experience in terms of equity inflows and whether there has been a quantifiable change in March?
A: Yes. March has been a positive figure for the industry but one has to look into the context that ultimately mutual fund flows are based on what has been sold in the market as well as the redemptions that fall in place.
If one looks at the gross sales, in the last quarter of last year the sales have been more than the earlier quarters. The sales have increased slightly. There is excitement beyond 15 cities. The distribution is again coming to life in those cities where the state makes sense for a distributor to sell mutual funds. So, gross sales have increased slightly. Another factor especially for the month of March and not for January and February is that redemptions have come down.
Whenever market corrects, redemption in this industry are going down. Two, it is the first one month that has been positive for the industry. Last year, the industry was Rs 15,000 crore negative but for the month of March, it is almost Rs 750 crore positive which is a good sign.
Q: This is not a typical March phenomenon because some of the year-end products that you push, do you see a lift in March that peters out in April?
A: No. It is not a March phenomenon because Rs 250 crore is what came in the Rajiv Gandhi scheme as an industry, so it is not substantial enough, Rs 5,000 crore or Rs 4,500 crore sale that one is talking for mutual fund across the country. Equity Linked Savings Scheme (ELSS) as well as Rajiv Gandhi scheme put together would not be that substantial. It was a general pick up that happened in March, also because what Sebi has done beyond 15 towns where distribution has increased.
There is a bit of excitement and when market corrects, Indian market to that extent has matured. Whenever market corrects, one gets inflows and when market goes up, one gets redemption so the retail investor in India has become smarter than five years back.
Q: People do not want to sell at lower prices so at 5500 Nifty, there is no great percentage for people to sell, does it require great acumen to see that?
A: Earlier, we use to see very disturbing trend. I am talking about five-six years back when there was lot of sales when the markets were going up. After 2007-2008, that trend has reversed and that is all I am putting it across.
Q: Is there a specific nature to the pockets that they are buying into? Are they more interested in general vanilla index funds or are they buying into some of the sectoral funds? Where is the money moving to?
A: The good thing is that most of the sales across the industry will be in the performing funds, gone are the days. The structural change that one sees in the industry is that the only funds that have performed well over the last three to five years will get inflows. The new fund offer (NFO) sales period has gone completely. Funds that are getting inflows have performed well over the last three-five years and are rated well by the various rating agencies. That is another good sign in the market.
If one has a performance, it gets money irrespective of the market conditions and if it does not have performance, it does not get money and will see redemptions. There is a distinct. The top 10 funds would be positive, while the whole industry was negative last year the top 10 funds in the industry would have got inflows.
Q: Would you extrapolate the lack of redemptions or the slowing down of redemptions to the coming months? Do you think it is just a factor of market falling so much in March that it might have kept those redemptions at bay?
A: It is more of markets falling that the redemptions are at bay. If one sees the data, in January and February the redemptions were quite heavy and in March the redemptions just dropped down. So, it is only one month phenomenon where redemptions have gone down. I just relate it to the market and not a fundamental change.
Q: Do you think the public confidence in equities as an asset class has gone down quite substantially because earlier one use to think that retail would get excited when there is some performance in the market but that did not happen in 2012? The markets went up but retail continued to stay away, do you think something fundamental might have changed? Will you need to do a lot of hard work and not just depend on prices going up to get people back into equities?
A: Correct. I agree that the confidence in equity because of one year, three year, five year phenomena where three years and five years were not much positive. One sees a lot of money going into gold, one would see a lot of money going into real estate, so as an industry everyone is going out. There is huge investor education initiative that is happening, but one will have to see fundamentally.
As a mutual fund person who understands equity market size, next one year is the time to come into equities because the market has not performed for a long period of time. But to go and explain to the retail investors, it is where we need to come and work with people like you and go into the interiors of India to explain that one needs to get into equity markets not when all news are good. It is very difficult to explain people that one should come into equity market when the news is negative. If the foreign institutional investors (FII) are selling, we keep trying to explain to people that if the FIIs are selling that is the time to invest into equity market in India and that is a very good.
Historically, if one sees whenever one has invested and FII are selling it is good time to invest. We track current account deficit (CAD) month on month and believe that it has already peaked out in the quarter of October to December. We will see a substantial drop in this quarter. We track a lot of signs that lead to CAD and the main problem of India, the CAD has already peaked out. In January to March we will see substantially good figures especially in the month of March, the CAD has gone down. So, explaining people that when the signs are positive and all the news are negative that is the time to invest in equity is becoming very difficult.
Q: By what parameter are you guaranteeing that the next year is the best time to buy into the equity market? Is retail the smartest player in the last five years because when gold was moving they picked gold when it was time for caution, they picked fixed income and have made the right calls in the last five-six years?
A: In the last five years they have redeemed. With the CAD, the interest rates will drop. As interest rates will drop and we face elections, once the new elections happen whichever government comes into power, all the right things will be put in place. There is no option for India but to put the right things in place. From there on, when the right announcements will be made, right actions will be taken, there will be no option for the new government to come in but to do the right things.
We need to give jobs to 50 percent of Indians who are less than 25 years of age. At that point of time, we will see a rally because by that time interest rates would have already peaked down. So, to make money in 2014-2015 one needs to invest in 2013. I don’t know the timing, whether it is today or six months down the line. Over the next one year if people invest in equities, 2014-2015 they should see good returns in equity markets.