Mutual Fund AUMs To Rise To Rs 100 Lakh Crore By 2025

The mutual fund industry continues to record flows into the market and is managing close to Rs 21 lakh crore in assets. As the fund industry gains in size and stature, Ashutosh Bishnoi, managing director and CEO, Mahindra Mutual Fund, spoke to Clifford Alvares of BW Businessworld on the prospects of the fund-management industry and on portfolio building if things go wrong. Excerpts.

What are the reasons for the huge increase in mutual-fund inflows?

Interest rates are coming off and so many investors have started to look at mutual funds including seniors. Almost every other traditional investment option is also looking down. The other important reason is that AMFI’s campaign is highly visible and appealing.

MF products have reached a level of reasonable expectations. There was a time 50-60 years ago when people were saying that you should open a bank account. Something similar is happening in mutual funds now.

So how is Mahindra MF looking at building its corpus?

We are small, but we have an advantage which is we are participating in an industry which is just at the takeoff stage. Much hard work has been done. Besides, we are looking beyond obvious cities. We have chosen to focus on towns where the Mahindra Finance is present. For us, we can try to compete against the big ones or to be present where our parent company is strong,  so we chose the latter.

Investors in a small city know and need mutual funds, but not many are selling them there.  There is sufficient distribution in the top 20-25 cities, but not sufficient distribution in the smaller towns. If you look at the penetration of say Mahindra Finance, we have operations in about 1,200 locations.  Mutual funds currently reach about 350 locations, so there is a distribution gap.

Hence we are not only trying to find independent financial advisers, but also encouraging young people in smaller towns to join the profession. We are getting inflows from over 200 cities, unlike other small asset-management companies. In the next five years, these markets will become bigger.

How do you see the Indian mutual-fund industry growing?

Indian MF is a much bigger market. I expect that we will reach Rs 100 lakh crore AUM by 2025 from the present Rs 21 lakh crore. SIPs are taking off. In the US, they also had a similar plan called a ‘letter of intent’ or ‘letter of commitment’, which is like an SIP, but it came with a commitment to invest. Once it took off there in the ‘80s, there were huge inflows into the US fund industry. We are seeing something similar happening here.

Do you see the domestic-fund outperformance continuing?

At present, the mutual-fund industry has about Rs 9 lakh crore in equity, which means that MFs comprise about 6.5 percent of the total market capitalisation of Indian exchanges. In the matured markets, when active funds under management reached about 30-35 percent of total market capitalization, it became difficult to produce alpha.

Today many fund managers can continue to produce alpha in India, because there is a gap. Only when the fund industry manages such a huge amount of money that the market depth cannot sustain it, then it starts to become difficult to produce out-performance.

So, one pre-condition that needs to be met is that businesses become so large that you cannot produce better than the index rate of return. To my mind, it will take a long time for the Indian markets to reach that stage, maybe another 20 years.

How do you see Indian stock-market valuations? Are they expensive?

The last time the market fell it was at 26 times earnings; hence, alarm bells are now ringing. But, we are still in the early stage of market maturity. More money is chasing asset classes. In India, two structural changes have been seen in the economy, clearly in favour of the markets. We are probably looking at valuation levels never seen before. There’s a lot of liquidity in India, and across the globe.

So what should investors do if it all collapses one day?

I have an interesting concept called the “cockroach” portfolio, which can work for conservative high net-worth individuals in a doomsday-like scenario. Your portfolio has to survive at all costs. It means you must look at quality. So, one should buy the best companies; in equity that means companies that will continue to grow even if capital markets shut down. Then, you have got to have the best debt, backed by companies such as high-quality utility companies whose debt is secured by solid assets.  So even if these companies are liquidated, the debt stands to get paid off first.  Lastly, the best quality cash, which is gold. If you have one-third in each of these three asset classes, that would make for a very good conservative long-term portfolio….and could survive a holocaust!