When fund managers, SEBI, Bollywood star and MasterChef descended on Moneycontrol's first MF summit: Key takeaways

The Moneycontrol Mutual Fund Summit in progress.

It isn’t every day that you get to see the who’s who of the mutual fund industry in the same room, let alone rubbing shoulders with members of the Securities and Exchange Board of India (SEBI), their regulator.

But on Wednesday, December 14, that was exactly what happened, as Moneycontrol, India’s largest financial news platform and the flagship digital platform of the Network18 group, hosted its first-ever mutual fund (MF) summit, in Mumbai.

With the Indian mutual fund industry turning 36, and crossing the Rs 40-trillion mark in assets under management (AUM), there was much to discuss through the day. Moneycontrol Editor Binoy Prabhakar put it succinctly as he set the ball rolling in his welcome address: “There has never been a better time to talk about the future of the Indian mutual fund industry."

The Summit's first keynote address was delivered by Chief Guest Ananta Barua, Whole Time Member, SEBI, who touched open the importance of regulating a sector that handles a humongous amount of money every day without hindering it, but keeping investor interests front and centre at all times.

The mutual fund industry as a whole benefits if there is full compliance with rules and regulations, Barua emphasised, noting that both scheme level risks and asset management company (AMC) level risks are addressed by regulations.

Also read: Moneycontrol Mutual Fund Summit | Compliance is not a burden, adherence to rules helps MF industry: SEBI member Barua

In the last two years, SEBI has unveiled many regulatory changes to protect investor interests, including revamping the risk-o-meter, introduction of a potential risk class matrix, inter-scheme transfers, and making it mandatory for employees of AMCs to invest part of their compensation into the schemes they manage.

The second keynote address was delivered by Usha Thorat, Chairperson of the SEBI Mutual Funds Advisory Committee and former RBI Deputy Governor. Focusing on governance, Thorat stressed that mutual fund houses needed to act responsibly while voting, as they were becoming bigger and bigger shareholders in corporate equities.

Thorat also said that the system needed to draw up a roadmap for the gradual exit of institutional investors from the mutual fund industry.

Association of Mutual Funds in India (AMFI) data show that the assets under management with the mutual fund industry hit a major milestone on November 30, crossing the Rs 40-trillion mark for the first time to touch Rs 40.3 trillion. The next target: Rs 100 million.

In a panel discussion on the ‘Opportunities and challenges for the MF industry to reach Rs 100 trillion', Nilesh Shah, MD, Kotak Mahindra AMC, Navneet Munot, MD & CEO, HDFC AMC, Radhika Gupta, MD & CEO, Edelweiss AMC, Neil Parikh, CEO, PPFAS AMC and Sreekanth Nadella, MD & CEO, KFin Technologies expressed optimism that the industry would hit that target in five years..

Shah pointed out that the biggest challenge mutual funds face today is adding value for investors. He felt that tapping the large pool of unattended investors, as many as 30 crore of them, will be critical in getting to the Rs 100 million mark.

Gupta, meanwhile, said that while SEBI regulations ensure that investor interests are protected, they also push up the cost of doing business, due to increased compliance costs, and that is a big challenge for the industry. She pointed out that “the cost of compliance, and cost of talent is going up, but margins are going down.”

She may have a point. One regulation in particular has made people wary about joining the industry. SEBI has made it mandatory for investment professionals to invest 20 percent of their salary in units of mutual fund schemes they manage. And that could prove a challenge in attracting talent, given that the technology and knowledge-intensive mutual fund industry needs to keep attracting the brightest minds for sustainable growth.

Parikh, meanwhile, said that profits need not be a long time coming for a mutual fund. “A lean organisation, not overspending and not spending on things you should not be spending on, can ensure profitable growth. We were profitable from year one despite our strategy of offering just one scheme,” he said.

Munot batted for investors putting more money into mutual funds. Indeed, the industry has been vocal about the extent of investments in risky assets such as stocks. Up to 90 percent of the money in equity schemes is invested by individual investors. Munot felt that much of that money should be invested in mutual funds given the track record of the industry and the robust regulatory framework it is subject to.

The summit also discussed the outsized influence wielded by a new breed of ‘advisors’ in recent times. These financial influencers or ‘finfluencers’, whether qualified or not, dispense investment advice, which could be promotional content at times, through social media platforms.

While their USP when they started out was breaking down seemingly complex financial concepts for retail investors, some now face allegations of generating sponsored content and advice without requisite disclosures.

This contentious issue was discussed threadbare in a panel discussion: ‘Financial influencers — democratisation or dilution of financial advice?’ The panel featured Kalpen Parekh, MD and CEO, DSP Mutual Fund, Harsh Roongta, Founder, Fee Only Investment Advisers LLP and financial influencer Pranjal Kamra, Founder, Finology Ventures.

All three panelists emphasised on the need for regulations, requisite disclosures and also due diligence by financial institutions such as mutual fund houses who tie up with such influencers for investor education.

Also read: Moneycontrol Mutual Fund Summit | Regulations the way forward for ‘finfluencers’ community? Experts weigh in

Alpha is an investing term used to describe an investment strategy's ability to beat the market’s benchmark return. Put simply, it refers to the excess returns that an investment generates over the benchmark. About 80 percent of all actively managed U.S. stock mutual funds underperformed their benchmark in 2021, according to S&P Dow Jones Indices’ annual SPIVA report.

That statistic set the tone for a panel discussion by chief investment officers on ‘Maximising Alpha – Can active funds truly deliver superior returns?’ The panel featured S Naren, CIO, of ICICI Prudential MF, R Srinivasan of SBI Mutual Fund, Anoop Bhaskar of IDFC MF and Neelesh Surana of Mirae Asset MF.

"We decided to focus on hybrid funds for alpha generation. That gave us liquidity. In March 2020, we could buy Rs 10,000 crore of stocks," said Naren.

Citing an example, he said that investors used to ask for a cap on PSU weightage in mutual funds a few years back. "But now look at PSU stocks — some are running up 10 percent in a day." So, being a contrarian can help generate alpha, said Naren. "Scale is a benefit if you are contrarian," he added.

But R Srinivasan of SBI Mutual Fund differed. "Being a contrarian helps create alpha in the short term. But beyond that, you don't need to be a contrarian," he said.

To be sure, Alpha generation has become tougher in recent years. "Markets have become very flat. It is not easy to find an HDFC Bank as we did in 2008," said Bhaskar. Instead, Alpha generation has come from IPOs, he pointed out.

Surana of Mirae Asset MF believes alpha generation is not a mutual fund's only job. "Our main job is to beat the benchmark. The second is to give better returns than peers. The third is absolute returns," he said.

Also read: Moneycontrol Mutual Fund Summit | Only solution to remain profitable is scale, says Nippon Life's Sundeep Sikka

A panel on new fund houses highlighted ways to overcome the challenges of differentiation and scalability. It featured Sundeep Sikka, Executive Director & Chief Executive Officer, Nippon Life India Asset Management, Rajiv Shastri, Associate Director & CEO, NJ MF, Ajit Menon, CEO, PGIM India MF and G Pradeep Kumar, CEO, Union AMC.

The only way new fund houses can be profitable is by building scale, said Sikka, adding that the biggest differentiation between companies that survived and did well was that they were able to find a niche for themselves. Fund houses also need to re-evaluate their investment strategy every year, said Sikka.

Shastri felt that anyone who tried to make the asset management business exciting was bound to fail. Kumar appeared to concur. “You can't be consistently above average by taking cash calls," he pointed out.