Indian mutual funds have been ballooning in size with assets under management (AUM) doubling in the last 3 years and have now touched USD 270 billion. Moreover, at 17 percent CAGR growth this industry is expected to go to USD 600 billion in the next five years.
Top 5 five mutual funds have dominated the Indian MF industry and manage close to 50 percent of the total AUMs of on the domestic side. Nilesh Shah, Managing Director, Kotak Mahindra AMC expects the industry growth to continue.
Kotak Mahindra AMC is the seventh fund which has got into the Rs 1 lakh crore AUM club.
Shah says, he would not be surprised if the Rs 1 lakh crore AUM number crosses to Rs 2 lakh crore in the next three years or even faster if more Indians realise the power of compounding their savings.
The house is positive on spaces where government is spending money -- railway construction, road construction and defence, social infrastructure, urban infrastructure etc.
Below is the verbatim transcript of the interview.
Anuj: Nimesh spoke about some mind boggling numbers, but you have been talking about it. We have seen some of that play out over the last one year. Can we extrapolate this data now over the next five years?
A: When I started my career many years back, I met a veteran of mutual finance industry and he said mutual fund will be like bamboo tree. You keep on working hard for five years, nothing will materialise and sixth year you will see a tree which will grow 30 metres in height. There will be always a hockey stick in mutual fund assets under management (AUM). Keep on working, do not lose patience, keep on ensuring that your platform continues to remain solid.
And I was wondering is this old gentleman telling me or he is just trying to retain me, he is just trying to motivate me? But I know, now his wisdom. Clearly last two years have been fantastic for mutual fund. Whatever we had dreamt of, the reality is far better than that and this is all possible because of efforts at the regulatory level, efforts at the distributor and advisor level and also the manufacturers, all the mutual funds put together who have really created a fantastic set of performance.
Anuj: So Rs 1-2 lakh crore happens in the next three years?
A: I would not be surprised. We will be in a position to achieve that number.
Anuj: Even if it is a combination of money being put and also the market factor, right?
A: Absolutely. And it can even happen faster if more and more Indians realise the power of compounding. Their savings pattern change from physical savings to financial savings. For example, if we see the provident fund, they have started investing in equity now. Globally, when we see the 401(k) plans, they are dominated by equity. Here we are till testing the water. Clearly a new pension scheme has been a fantastic move which allows a far better return than provident fund.
So if we unlock that corpus of savings which is stuck into the fixed income or traditional investment towards mutual fund, this growth can even be faster.
Surabhi: It is great to hear about the money and the kind of numbers that are coming through, but is there a bit of a problem of plenty also that fund managers are now facing? Looking at valuations, looking at the sort of ideas we have in the market and we keep talking about limited ideas and again the money chasing the same set of stocks, is that a bit of an issue right now?
A: Undoubtedly, there are challenges. When Tendulkar started playing at 20 years of age, he would have one style of batting. At 30, he improved. At 40, he would have changed it. So we also have to grow with the size and we also have to adopt with the larger size.
But if I look at with just from a top down point of view, today Indian mutual funds will be roughly about 6 percent of market cap, foreign institutional investors (FII) are at 25 percent of market cap. Most of the FIIs bearing few exceptions would have underperformed mutual funds, so definitely I have to keep my performance track record. But if those FIIs can still deliver performance at 24 percent of India's market cap, presumably, at 6 percent of market cap, I have some more room to go before I have to worry about my size.
Anuj: I was at this AMFI Summit last week and I was having a discussion with S Naren and Prashant Jain and a couple of others. This 4.5-5 percent of India's market cap, you are saying it is closer to 6 percent. The problem is, do we have enough free float now for mutual funds to capitalise or will we have to bank on taking some ownership back from FIIs or do we need some kind of structured products now where you can take more than 100 percent ownership of listed stocks?
A: I really wish and pray that FIIs start selling Indian equity and we will be able to buy it at cheaper price, but I do not think FIIs will be that kind. They are unlikely to let go a train which is running at 15-16 percent compounded per annum for the last so many years. They are unlikely to let go a share in an economy which is likely to become third largest economy over the next couple of years.
So, I do not expect FIIs to be this charitable that they will give us easy entry point. So, we will have to go to other revenues for making investments. Those avenues will be exited by private equity funds as their funds come to an end. Those exits will be neat for infrastructure investment by Indian entrepreneurs including government. Those sellings will be done by government who will be looking to raise resources through divestment. Those exits will be through new areas which is getting listed like the insurance.
Some day, mutual funds will get listed. You will have hospitals and so many services which will get listed. So my ability to pick up stocks will be more from divestment by government and by private equity funds than the newer segments getting listed.
Anuj: That also explains the kind of interest we are seeing in a lot of new initial public offerings (IPO)?
A: Absolutely. We have seen new IPOs getting listed at reasonable premium or reasonably high valuation as if they have already put in 10-15 years of track record in performance. So clearly.
Surabhi: But from what you are saying, there is ample ammunition now with domestic funds to absorb FII selling as and when it happens or if it continues happening though it has been, that has been a trend now. It is almost an accepted norm.
A: Clearly, there was always a dream as Indian mutual fund manager that one day I will receive the same respect as a 'gora' is getting. And today, it is fair to say that we get the same treatment. In the IPOs since 2014, Indian mutual fund and Indian financial institutions have put in more money that FII. Today, it is no longer necessary to sell your IPO by visiting Singapore, Hong Kong, London and New York. You can actually achieve it by just visiting Bandra-Kurla Complex or Lower Parel, Nariman Point and Chennai.
So it is a great sense of achievement in that sense. But more importantly, the size of AUM does not matter as long as we do not have satisfied customers and what is comfortable today is that when you go out, some elderly person blesses you saying that Nilesh, your funds are doing well, that gives you immense satisfaction. Rs 1 lakh crore, Rs 2 lakh crore, who cares? But that blessings which we get, I think that is beyond numbers.
Anuj: You have got some smart fund managers as well. But with great power comes great responsibility. The market is not cheap and there is this habit of retail investors. This time it has not been the case of jumping in at the top. Do you get a sense that it is risky to may be put a lot of money in the market right now even via the mutual fund route or do you think that is still the way to go?
A: Undoubtedly, one should take into consideration the risk return profile and if you are overweight equity or if you are leveraged equity, this is the time to book profit in direct equity as well as in equity mutual funds.
And I just point out one thing. In 2003, we were all riding on huge performance in fixed income funds. 1997 to 2003, our fixed income funds delivered better returns that most equity funds. And people were throwing money at us. And all the fixed income fund managers put together, gave a unanimous call to the investors that it is time to exit fixed income funds in favour of equity, in favour of liquid funds. And almost 90 percent of fixed income corpus came down over a very short period of time.
I do not think there is any parallel to this in the entire history of world mutual fund where fund managers went out to derail their product to take investors out of their product. What we did in 2003, a lot of these people are still active in the mutual fund industry and if a time comes in equity market where we will have to take a call to the investors that it is so expensive and it is so bubble and you should be taking your redemption out, we will not hesitate to give that call.
Surabhi: Let us also talk about the here and now, this market today and as things stand. If you were to put in fresh money, where would that money go right now?
A: We are essentially picking up a couple of themes across the market capitalisation. The one theme is, in absence of private investment, whichever area the government is spending money, those businesses are getting volumes as well as growth. So railway construction, road construction, defence, social infrastructure, urban infrastructure, these are the sectors where government is spending money and we are seeing volume growth over there.
The second big theme which is being played out is shift of physical savings to financial savings where people like you have contributed immensely in educating investors and now we are riding that curve. So right from banks to non-banking finance companies (NBFC) to mutual funds to insurance companies to broking companies, to financial intermediaries, we are seeing this trend.
The third thing which we are picking up is the shift of unorganised sector to organised sector courtesy GST introduction. Of course, it is going to have short-term pain, but long-term there will be significant benefits. So these are a couple of themes on which we are weaving our portfolios.
Surabhi: I am very tempted to ask you a follow up on that. The shift from unorganised to organised, there has been a huge run on stocks because of this whether it is certain apparel companies, whether it is logistics stocks, the entire gamut, whether it is tile companies, etc. building products, just because of the GST advantage. Is there more to go or is it getting a bit excessive now?
A: I would like to quote one example of a private sector bank which is attributed to one of the smartest investor in Indian equity market. Radhakishan Damani was a big owner of HDFC Bank when HDFC Bank got listed and he was obviously buying it at very expensive prices and someone told him, why are you buying this stock, it is so expensive, why not buy some other stock. And he said, see, Dharavi is Dharavi and Pedder Road is Pedder Road.
So yes, what you are buying today might look expensive, but we are underestimating the ride or the trend which is carrying it. When you invest with a trend in a successful entrepreneur, the kind of return it can give, irrespective of what price you have bought is amazing. We all started moving from watching a movie in a 'dabba' theatre to a multiplex. The price which we are paying for the entire family's excursion to dabba theatre is now the price of popcorn in multiplex. Now if you could ride that wave, you have seen what happens to multiplex theatre's prices.