Inflows into debt funds unhurt, financialisation of savings to chart a steady course: Fisdom CEO

Fisdom CEO Subramanya SV. (File photo)

In a freewheeling chat with Moneycontrol, Subramanya SV, co-founder and CEO of Fisdom, strikes an optimistic note, saying that contrary to market expectations, inflows into debt funds are not headed for a fierce drubbing.

The fintech CEO also marked out that India's new overture towards the financialisation of savings marks a decisive turn in the road and is unlikely to falter in the future. Edited excerpts:

First and foremost, the elimination of indexation benefits for debt, gold and hybrid funds. What has been the experience for investors? What is the kind of battering debt funds are likely to take in the coming quarters? How do you read the move?

The elimination of indexation benefits for debt, gold, and hybrid funds was unexpected. It was not stated in the initial budget but was included in the final fine print in the last week of March.

The immediate effect of this change was seen in the last 4-5 days when a large number of people invested in debt mutual funds (MFs). Going forward, I don't see a large-scale impact on debt MF investments because the alternatives are basically fixed deposits (FDs).

Compared to FDs, even with indexation going, debt MFs offer two benefits.  Firstly, taxation is payable at the time of sale as opposed to accrual in the case of an FD. The second is liquidity.  Debt MFs provide liquidity, unlike FDs, which have lock-ins and exit costs, and, hence, I don't see any large-scale impact.

We have also seen previously that when taxation was introduced, for example, on equity MFs, long-term capital gain (LTCG) tax was zero percent. Later, 10 percent taxation was introduced for earnings beyond Rs 1 lakh and the expectation was that it might hurt inflows. But there has been no reduction in inflows into equity MFs, and it continues to be very strong.

In summary, I don't see any meaningful impact of taxation on the inflow into debt MFs. Also, a significant percentage of debt MFs are contributed by corporates, which, typically, keep the money for less than three years. So, only money kept for more than three years will be affected.

Taxation is applicable only on fresh inflows from April 1, 2023. So, existing customers who have already invested will not be affected and will still have to bear LTCG, with indexation benefits available.  So there won't be any large-scale redemptions. Fisdom debt MFs are a smaller part of the portfolio and most of our customer AUM is in equity MFs. We had some higher inflows in the last few days of March and the data is still early. We think we will continue to get the flow.

There seems to be nothing stemming the inflow of funds to MFs via SIPs. Since October 2022, the inflows have been averaging over Rs 13,000 crore. For FY23, the inflows, at Rs 1.41 lakh crore, have easily surpassed FY22 inflows, which stood in the range of around Rs 1.24 lakh crore. What explains this resurgent belief in SIPs as a preferred mode of investment? Further, what explains this persistent interest despite market volatility and economic concerns?

In our opinion, the risk-taking ability of an average Indian has increased over the past few years due to economic growth and better awareness. Per-capita income has also gone up over the last several years, leading to an increased ability to take risks and remain invested even during market fluctuations. We have seen examples of people setting aside amounts ranging from hundred rupees to a few lakh rupees, where they're just treating it as savings and thinking long term.

Also, thanks to various campaigns by the Association of Mutual Funds in India (AMFI), people have realised that SIP investments can yield significantly higher returns than FDs in the long run.  As a result, we are seeing very strong SIP inflows, and we expect this to continue. For us at Fisdom as well, we get a significant part of our monthly inflow through SIPs from tier 2 and 3 towns.

People in these cities have embraced monthly investments as a way of saving.  Previously, they would make recurring deposits in banks or post offices, but now they are investing in equity MFs through SIPs.  So, the concept of monthly investing itself is not new. What has changed is the ability to stay invested when the markets go up and down.

The fact that they are investing small amounts of money every month makes sure there is no large-scale fluctuation in their value when the market goes up and down, which is keeping them going. We expect this SIP phenomenon to continue very, very strongly in the next few years.

Is it not high time that a new narrative needs to be written for startups? In the course of the last two-three years, the trajectory of the listed startups has been quite disappointing. A lot of their operational dynamics have proven to be unsustainable, namely, hyper-scaling boosted by a cash burn or a deliberate foregoing of margins in order to build a customer base in an uber-competitive environment that, inevitably, leads to dismal profit margins. What comes next for these listed companies as well as those lining up to list themselves? What course correction is due for them?

The Indian capital markets expect predictability and profitability. This means companies must have a clear projection of their earnings and profitability. However, most technology companies that have gone public in the last couple of years lacked either or both of these. So most of them were loss-making with future potential and predicated on the growth of the top line and some of them were not unpredictable.

The numbers that were represented at the time of the IPO were not met for a variety of reasons.  Therefore, the key for any company looking to go public is to make sure that they're able to predict their next three years of business, which means that there are no new initiatives or shutting down of existing ventures.

Predictability is the top priority, followed by profitability. Many of the companies that went public showed a path to profitability, but it hasn't been realised yet.

So the next set of companies that will go public must have a clear short-term path to profitability or already be profitable and give a predictable line to future earnings over the next three years. To achieve that, companies also have to carefully think through their business model, make sure that the core is working effectively, and identify the ancillary businesses, ensuring that the business is fundamentally strong before they go public.

Indians are steadily pacing ahead with the financialisation of their savings. A Crisil report states that, by 2027, assets of the managed investment industry will shoot up to Rs 315 lakh crore from the Rs 135 lakh crore seen in March 2022. Do you see Indians staying the course with the financialisation of their savings or one could possibly see their loyalties change back to physical assets like gold and real estate?

I believe the financialisation of savings is a multi-decade trend that will persist beyond just a few years, due to various long-term structural factors. The first one is the whole digital infrastructure, which enables anyone to become an investor very quickly, through Aadhaar, UPI and other means.

The second one is demographics. With around 400 million people in India being comfortable with e-commerce and digital payments, this benefit is coming to investments as well, where people are willing to easily make investments. So, the friction of onboarding and investing has completely gone away.

From a structural perspective, the traditional sources of wealth storage in India have been gold, real estate, and bank deposits. Interest rates on bank deposits have decreased over the last 10 years, although in the last year, interest rates have gone up and we are approaching the interest-rate peak. So, rates will go down.

As India moves towards a developed economy, the cost of financing will have to go down and interest rates will continue to decrease.  As a result, bank deposits are becoming less viable options.

Gold, on the other side, has been volatile and people have realised that equities generate more returns than gold in the long run.  In India, typically, people don't see gold as an investment and it has more emotional value as jewellery than just investment value.

Real estate continues to attract capital allocation in some parts of the country, but that will, as a percentage of overall assets, continue to decrease, because investors also realise that real estate comes with transactional and business costs that can be avoided with financial assets like REIT investments.  As investor awareness increases, capital markets will continue to attract capital in all forms. Therefore, financialisation of savings is a trend that will likely continue for the next 20-30 years.

There is talk of the market regulator introducing new total expense ratio (TER) slabs for MFs, changing the extant system in which TER is determined on the basis of the AUMs. Irrespective of how this plays out, many players in the market are voicing concerns over the regulatory overreach. There are other pain points in the work for investment advisors and research analysts who have been directed to follow an advertisement code. How do you perceive the newer regulatory frameworks being introduced by SEBI?

It is true that the regulator has been tightening compliance norms for various market participants, like MIIs, AMCs, brokers, and distributors, over the last few years. SEBI's key objective is to ensure that retail investors’ interests are protected, as there is often an information asymmetry that puts retail investors at a disadvantage. Therefore, all steps were taken by the regulator to protect the interests of the last man standing. These are all welcome steps.

One of the good things about SEBI is that it generally issues a notice, holds consultations, gathers feedback, and takes a decision after that. It provides a clear timeline for implementing regulations.  This is something we've seen over the last 20-30 years, where each time the regulator brings out a regulation, there is a temporary shock of a few weeks or months, and life returns to normal.

For example, in stockbroking, we moved from T+2 to T+1 settlement, and in MFs, the usage of pool accounts by brokers was eliminated. Although there were temporary operational hassles in both cases, everything is now running smoothly.

Each of these steps by the regulator is in the best interest of the average investor. Market participants have to bake this into their business model, because with more regulations, the cost of compliance only goes up and businesses have to ensure they remain viable. Boards and management teams must take the increased costs of compliance and doing business into account while planning and budgeting.

India has a comprehensive and rather overwhelming regulatory landscape for fintech players. Compliance cost, over the years, has been spiralling and a larger share of the financial resources is required to be directed towards compliance and supervisory aspects. How should fintechs deal with the rising compliance burden, while, hopefully, crafting a playbook that helps reduce friction with regulators?

Institutional investors, founders, and board members must carefully consider the cost of compliance and incorporate it into their business models. Fintech companies should also treat compliance as a key corporate objective.

It is essential to ensure that the revenue structure is in sync with the other costs involved in the business, including all compliance costs.