PersonalFN is privileged to bring to you an exclusive interview of Mr Chandel shares his view on the Indian mutual fund industry, Indiabulls Mutual Fund’s outlook for the equity markets and its investment strategy.
Mr Sanjay Chandel, CEO of Indiabulls AMC
Quantum Information Services Pvt Ltd (PersonalFN)
PersonalFN: -Indiabulls has relatively been a late entrant in the Indian mutual fund business, while some established fund houses are looking to exit from their Indian MF businesses; where is the industry headed, in your view?
Mr. Chandel: The industry has seen a lot of changes over the past few years. We expect the industry to stabilize within next 1 – 2 years in the sense that the policy changes should be far few in comparison to what has happened in past 3-4 years. Also, it is very important what kind of business model one adopts. Even though mutual fund is a push product, the revenues that AMCs are allowed to charge is very miniscule. Therefore, if you have a high cost structure you will find it difficult to survive and grow in the industry. It is important for any player that comes in this space to think about curbing the costs. At the same time, it is important to reach out to the larger number of investing public.
PersonalFN: - Do you think the industry will move ahead with new players entering?
Mr. Chandel: There would be some consolidation. Some weaker players who have been around for a long time now may possibly think about exiting the business. This will give way to consolidation and we may have lesser number but stronger players going forward.
PersonalFN: - As you already know that DTC is expected in 2013-14, and if ELSS is scrapped what would be the impact on the industry?
Mr. Chandel: More than the impact on the industry, I feel that this is a good product for spreading equity cult among the masses. Typically a retail investor invests in fixed income products like Bank FDs, where the returns barely beat the rate of inflation. ELSS product offers not only tax benefit, but also an opportunity to generate inflation beating returns over a three year period. It would be desirable to retain this product to spread the equity cult in the country.
PersonalFN: - What are the competitive advantages you think will separate out Indiabulls from the established mutual fund houses which are doing business in India for more than a decade now?
Mr. Chandel: Indiabulls started out as financial services / securities market company. We are known for providing excellent services to the clients whether it is securities market or in financial services. That gives us a good brand recall, which is going to help us market our products. Also, we have access to branches of group companies, which will be selling our mutual fund products. We are also trying to penetrate in areas where not many mutual funds traditionally go, so that we create new investors.
PersonalFN: - After having launched a liquid fund and an ultra-short term debt fund, followed by a bluechip fund a maiden offering in equity category in a period of just 5 months; what do you plan to expand in your product portfolio? What next addition will we get to see on the list?
Mr. Chandel: As of now we plan to offer to investors a bouquet of plain vanilla products and then get into something which is specific to the requirement of different class of investors. So, one could expect duration funds, FMPs, Gold ETF, monthly income plans (MIP) and asset allocation funds over next few months.
PersonalFN: - How does the fund management team at Indiabulls AMC function? What are the investment processes & systems that the fund management team follows?
Mr. Chandel: On the debt side, we created a universe of companies based on certain qualitative parameters. We don’t invest in companies, even for short term products like liquid and ultra-short term funds, if the rating is less than ‘AA’. In addition, we avoid companies which may have perception issues.
On the equity side, for Bluechip Fund, we would be predominantly buying companies with a market capitalization higher than the market capitalization of 101st company in BSE 500 index, arranged in descending order of market cap.
As far as fund managers are concerned, Raju Sharma has been associated with Debt Market for last 20 years and before joining us, he was working with Tata Mutual Fund. He is ably helped by Puneet Srivastava, who has worked with Sahara Mutual Fund before joining us and has total experience of about 15 years in the industry. On equity side, our fund manager, Aviral Gupta was associated with Venus Capital (an FII), where he has co-managed about USD 700 million and received several awards. Prior to Venus, he was associated with domestic MFs like Dundee and Escorts
PersonalFN: - How big is the research team?
Mr. Chandel: We have two people as of now since we have one operational equity scheme. On the debt side, the fund managers and the dealer do most of the research. However, as and when need arises, we shall beef up the research, which is one of the most critical area for any successful MF.
PersonalFN: - Please share with us your thoughts on the current state of the global economy and to what extent India will be affected with the global developments?
Mr. Chandel: Euro zone, more specifically PIIGS countries continue to be the concern of world markets. Though now euro zone seems to be finally getting its act together. Through LTRO euro zone has flushed the Banks with funds and has unleashed an indirect quantitative easing, which seems to have succeeded in breaking negative spiral of risk aversion. Also, Macro data on housing sector, falling unemployment rate, PMIs indicate that US is stabilizing. US Fed has indicated that it will keep benchmark interest rate at record low levels (almost zero) till mid 2014 spurring the risk on trade. Ben Bernanke has indicated that QE3 is a possibility if economy stalls, thus providing a possibility of further quantitative easing by US Fed. Overall things seem to be stabilizing in global economy.
India continues to be dependent on foreign capital flows to fund its current account deficit and remain exposed to possibility of energy shock due to high oil prices. As per SEBI data, in 2011, FII withdrew just USD 500mn. In 2009, 2010 they pumped in close to USD 47 billion; this indicates that FII have faith in India. Let us remember that we still are second fastest growing economy in the world. In a world flushed with liquidity, if we can come out with some big ticket reforms & focus on fiscal consolidation, we can attract huge amount of foreign capital flows. However, adverse developments in Euro zone can also trigger global risk aversion, which can trigger downsides in our markets.
PersonalFN: - Equity markets have taken everyone by surprise with the rally that has sustained over the past 1.5 months. Do you think anything has changed significantly on the macro level?
Mr. Chandel: Not really. Inflation firmly in downward trajectory, Government finally showing some resolve to tackle business related issues, RBI’s 50 bps CRR cut and Global liquidity have changed the investor sentiments significantly.
PersonalFN: - Do you think RBI will cut interest rates at its fourth quarter review of monetary policy?
Mr. Chandel: There might be 25 bps cut to signal that after 13 hikes and 1 pause, faltering economic growth is a bigger concern. Also, there might be a cut in CRR to ease the tight liquidity conditions.
PersonalFN: - Where do you see the equity markets headed in the short term as well as long term?
Mr. Chandel: Over short term, we expect the market to remain range bound and take direction from the outcome of assembly elections and Union Budget. However, over a longer period we expect about 10% to 15% rise in Sensex or Nifty from here.
PersonalFN: - Sectors that Indiabulls expect to be in favour and intends to be bullish on which will reflect in your equity fund and also bearish sector which Indiabulls will avoid taking exposure in?
Mr. Chandel: We are bullish on interest rate sensitives, IT and Capital Goods. Neutral on Pharma and Consumption sectors.
PersonalFN: - What is the one major market factor that is worrying the fund management team at Indiabulls and the strategy that Indiabulls has prepared to protect its fund from this factor?
Mr. Chandel: Greece and peripheral Euro zone is the immediate concern and then the outcome of UP elections and Union budget would be the key events. We would be cautious in our investments till the time the uncertainty recedes. We have planned for a combination of asset allocation and hedging strategies to mitigate the impact of such events.
PersonalFN: - Earning forecast for 1 yr, 2 yrs and 3 yrs
Mr. Chandel: We are working with a Sensex EPS of around Rs. 1260-1280 for FY13, anything beyond that would be difficult to forecast as of now. Markets are currently trading at forward PE of around 14. Average forward PE for the market is around 15 – 15.5. With improving market sentiments, we expect market to go up by 10 - 15% in the next 1 year.
PersonalFN: - ….and what is your take on the bond markets?
Mr. Chandel: We feel that interest rates would come down slowly from next quarter and this easing interest rate cycle is likely to continue for next few quarters. In such an environment, the duration funds are a sensible investment avenue.
PersonalFN: - Does Indiabulls have a mutual fund to cater to this advantage?
Mr. Chandel: Not immediately, but we are filling a few schemes like income, bond, gilt funds.
PersonalFN: - Where do you see Gold headed? Is Indiabulls MF looking for an asset allocation towards gold as an asset class? What is your strategy to benefit from this asset class?
Mr. Chandel: Gold as an asset class performs well in uncertain times. It should form a part of a portfolio as a hedge against uncertainty and inflation. With uncertainty around PIIGS countries yet to abate, we expect Gold prices to be firm. However, we do not see significant upside in short term. In our view, Gold continues to be a buy on dips. We are considering a few Gold based products to offer to our investors.
PersonalFN: - What steps does Indiabulls take in the form of Risk management to protect the interest of the investors in its scheme?
Mr. Chandel: We have put in place a comprehensive risk management policy wherein apart from SEBI prescribed framework, we have many internal norms to monitor and mitigate the risk.
PersonalFN: - Very few retail investors have successfully made money in last 3-4 years. What would be your advice to the retail investors?
Mr. Chandel: Unfortunately in this country, equity investments are seen as an asset which would guarantee positive returns in a short span of time. This mindset needs to change. Equity investments have historically given superior returns as compared to any other asset class in long run. One needs to be patient when one is investing in equity. Investors need to research the company well, if they are investing directly otherwise they should consider the mutual fund route.
PersonalFN: - Anything you would like to contribute from your side?
Mr. Chandel: Equity mutual funds are much superior to many other products available in financial markets but have not been able to penetrate for want of incentives to reach out to smaller places. There are costs involved in acquiring a customer, more so in Tier 2 or Tier 3 cities. There is a need for Indian mutual fund industry to be incentivized to offset the costs of reaching out to Tier 2 or Tier 3 cities. Also, only PAN card holders can invest in mutual funds, this restricts the number of possible investors to about 8 crore against the population of about 120 crore. Further, MFs cannot accept cash applications. Also, there is mis-selling of ULIPs due to higher upfront compensation structures. These are some of the issues plaguing the growth of MFs in India.
PersonalFN: - Is Indiabulls AMC creating some sort of awareness amongst investors through any mode?
Mr. Chandel: Wherever we have home loan branches or Indiabulls Securities branches, we are trying to create investor awareness. But most of the people who turn up are already literate; we need to reach out to people who are not financially literate today. May be mutual funds should be given a particular state or region for development (financial literacy). This approach can be based on the model of a ‘Lead Bank’, designed and implemented by the Reserve Bank of India (RBI) to develop banking facilities in the rural India. The chosen MF for the particular state / region along with the incentives may be given certain responsibilities under financial CSR.
PersonalFN: - Mutual Fund industry has 44 AMCs managing 1,650 schemes and if we consider all the options then the number is more than 4,500 and it is still growing; so do you think investors are facing difficulty in selecting the right mutual fund and if yes, a concept FoF can be option to it?
Mr. Chandel: Fund of Funds itself is a complex concept. When investors are not able to understand the difference between various equity products available, then Fund of Funds will also not make much of difference to them. Investors need simple products which are easy to understand.
PersonalFN: - Don’t you think FoF would help curb the mis-selling of financial products as many distributors, agents ask investors to withdraw from mutual funds and invest in ULIPs?
Mr. Chandel: It can, but again investors need hand holding and simple products; Fund of Fund would be difficult for a layman sitting in Patna or Bhubhaneshwar to understand, it is going to take time. Mis-selling would continue till the time incentive structures continue to be skewed in favor of distributing ULIPs.