Fund houses are exploring various options to comply with SEBI’s norms: Edelweiss AMC

The mutual fund (MF) industry seems to be going through another period of transition with flows into equity schemes diminishing, regulations continuously changing and direct equity investing gaining traction. In an interaction with Jash Kriplani of Moneycontrol, Radhika Gupta, managing director and chief executive officer of Edelweiss Asset Management Company, shares her views on the ramifications of these changes for the industry, and also her own fund house’s future plans. Excerpts.

What do you make of the slowdown in equity fund flows?
There will be cyclicality in flows because markets are cyclical. There will be periods when money will come in and move out. The industry saw month-on-month growth in flows for a long time, which is why these instances of negative flows seem surprising. Overall, there is still uncertainty around the COVID-19 pandemic, corporate earnings and domestic economy. So, investors are taking money out. A set of investors has also taken profits off the table as the market outlook remains unclear, despite recent rally. The positive thing is that monthly contributions through systematic investment plans (SIPs) have remained healthy, even though there has been a bit of a contraction. Post-demonetisation, there could have also been chances of over-allocation to equity, which can happen during bull-run in markets.

The monthly SIP book has also contracted by about 10 per cent since March. Is this a reason for concern?

We are in a tough economic environment, where there have been job losses and uncertainty around incomes. The average Indian investor is not immune to this environment. So, investors facing cash flow uncertainty would have terminated their SIPs. However, the drop in SIP contribution is still lower than what was expected given the uncertainty in the environment. There are still 9-10 lakh fresh SIPs coming into the industry, which is a healthy sign.

While the COVID-19 pandemic has caused a cash crunch for investors, there has still been uptick in interest for direct equity. How do you look at this trend? Are we seeing some segment of mutual fund investors switching to direct equity?

There could have been some switches to direct equity. However, not enough time has passed to extrapolate it as a clear trend. It is happening not just in India; there has been strong interest for direct equities globally in recent times. It is also a function of people sitting at home and spending time engaging with stock markets. However, whether investors are coming into stock markets directly or through exchange traded funds or mutual funds, the basic principles of equity as an asset class are still the same. This trend could also mean that investors are becoming more comfortable with equity as an asset class, which can be seen as a positive sign.

What is the road ahead for multi-cap schemes following the new limits introduced by the Securities and Exchange Board of India (SEBI)?

First, investors should not panic. The road ahead is evolving and that is very important to note. Initially, a section of people got carried away with possibilities of a small-cap run-up, which was also analysed widely by several research reports. The mutual fund industry is engaging with SEBI to discuss various alternatives. Fund houses would finally act, depending upon what is in best interest of the investors. There is an option of merging schemes, positioning the multi-cap scheme in another category and also the possibility of introducing a ‘flexicap’ category. The NSE 500 benchmark has less than 25 per cent combined weightage to mid and small-caps. So, the new proposal to have a minimum 50 per cent allocation to mid- and small-cap schemes, can lead to significant change in the risk of multi-cap schemes. Investors signed up for a particular risk grade when opting for multi-cap schemes.

Why have multi-cap schemes become large-cap heavy?

The reason for multi-cap schemes being large-cap heavy can be attributed to multiple factors. These portfolios were aligned to the NSE 500 benchmark. Also, large-caps have been safer plays and are liquid. With small-caps, it can be challenging to absorb the 25 per cent allocation of multi-cap schemes. The last few years have taught us that liquidity is very important in a portfolio.

What are some of the new products Edelweiss AMC is planning to launch?

We are looking at passive investing on the equity side. We want to do passive products with a little bit of difference. In the coming days, we would be launching a product, which would be a first passive product in the industry in partnership with MSCI index provider. One of the things we have observed is that there isn’t a significant alpha creation in sectoral funds. The sector itself is a very active call, and within that the universe is restricted. So, there is not much alpha opportunity (‘alpha’ is defined as excess returns or outperformance of the fund against its benchmark). We will be launching Indo-Global Healthcare passive fund in early October. This will be an index fund focused on healthcare, with 70 per cent allocation to Indian healthcare companies and 30 per cent allocation to global firms.

What is the rationale for the AMC launching products focused on the international space?

We have liked international funds for a long time, but they should be bought for the right reason. The reason cannot be just that they have done well over the last year, as there are risks to international funds as well. We want to give investors access to interesting ideas in the international space. These international products could be standalone ones such as US Tech or blended products such as the healthcare fund. It would be a function of the investment case that would determine whether the product should be a 100 per cent international play or 30:70.