In Vivek Reddy’s own words, ‘he is the first employee of the first private sector mutual fund in India’. Kothari Pioneer Asset Management Company (KPAMC) owes much of its success to Vivek Reddy, its former chief executive officer (CEO).

Vivek Reddy has pioneered many a concept, the most important being that of daily net asset value (NAV). He also set the ball rolling by launching a slew of sectoral funds (IT, pharma, FMCG) that was later aped by other Asset Management Companies.

Under his able stewardship KPAMC emerged as one of the most profitable and front-running Asset Management Companies in the country. An engineering graduate and an MBA from the University of California, Vivek Reddy was a management consultant in Los Angeles for four years prior to heading KPAMC.

PFN: What would be your advice to investors looking at investing in the present scenario – from the aspect of both debt and equity funds?

Mr. Reddy: Every investor must look at investing in equity and debt in line with his needs. To that extent, the fundamental tenet of investing still remains the same i.e. financial planning or asset allocation. So the conservative investor who wants stability in returns should look at debt funds and the investor looking at capital appreciation over the long term must consider equity funds. Within this broad context, the bias must be towards equities for anyone with a longer investment horizon of 3-4 years.

On the fixed income side, given the lower interest rate regime, investors can expect about 7% returns going forward. Compared to this scenario, we need to look at relatively undervalued equity markets and decent corporate performance of about 12 - 15% - boosted by higher profitability and a re-rating of the price to earnings (P/E) ratio. With this we could be seeing an annualized growth of about 15% and when we consider that fixed income could be giving half of that, there is a compelling case for investment in equities.

And with interest rates on a decline, this could see the added liquidity finding its way in the stock markets. That has been the trend in other markets like the US. We haven’t seen that happening here largely due to lack of confidence in equities. But once investors get some degree of confidence in equities, the scenario could improve. So earlier if investors were looking at an asset mix of 50% in equities and 50% in debt, they can maybe now look at 60-65% in equities.

PFN: How should one go about selecting an asset management company (AMC) and subsequently a mutual fund scheme given that performance of most AMCs has been mixed?

Mr. Reddy: Investors should look at the long-term performance of the AMC. They should see how its funds have performed over 1, 3 and 5 years. This gives an idea of how the fund manager has performed in that period. So if the AMC has performed well over these investment horizons, but there is a new fund manager in place, then this does not mean much. Typically, the investors need to look at the long-term performances and not just over the last year. This is one of the most important guideposts. Then they need to see how responsive the fund can be, how is good is its servicing level. The next criterion would be the sponsor’s background, their experience and integrity. But given that most mutual funds have credible sponsors, it’s not really a differentiating factor.

I would say apart from the performance, track record and the portfolio of the fund, expenses are the most critical criteria. On a scale of 1 to 100, where 100 indicates a fail-safe investment decision, I would give track record, portfolio and performance a weightage of about 15%. I would give expenses a weightage of 10%. I would give service levels, responsiveness a weightage of 10%. The sponsors and promoters would get a weightage of 5%. That leaves you covered for 40%. I would say that’s about the best an investor can do and leave the rest to God!

PFN: Three of the best five performing equity schemes over the last 5 years have been from the Pioneer ITI AMC, an AMC that you set up. To what would you attribute this success?

Mr. Reddy: Our approach to business was simple and direct. We knew what the investor wanted and we tried to give that to him without any frills. If we liked our research on a company and found it fundamentally sound and able to give value, we bought it. That was our approach, no technical analysis and no exotic theory. We applied our common sense and judgment to go with our decision and these two factors did the trick for us. We did not allow ourselves to get distracted by anything. A lot of funds follow styles of investing or a process and that governs their investment decisions. They believe that fund managers can come and leave, but they have to follow the processes. With us, there was a lot of individual style.

PFN: One other key feature that distinguished Pioneer ITI from its peers was its large retail base. Why were you ‘successful’ in developing a retail franchise even as others were compelled to focus on corporate funds?

Mr. Reddy: Again it was our direct approach that endeared us to the retail investor - our attitude and culture and plain speaking style, no jargons, no technical details. We attracted a lot of retail investors by meeting up with a lot of retail intermediaries. We valued even a Rs 10,000 application. A lot of funds seemed to believe that 1% (profit) on a Rs 10,000 application isn’t worth it. But we found that if we had a fair number of these applications it added up to quite a bit. And not all of them are active and demanding.

Mr. Reddy: Also the Rs 10,000 investor can give you repeat business and that reduces your cost of marketing. When other funds saw the Rs 10,000 investor, they did not realise that he could be representing lakhs of investors. We got a lot of repeat investments. In fact in the last couple of years we had about 40 - 50% share of applications. We also had extensive reach with over 30 offices in the country. We had a lot of our people going to several districts and non-metros and speaking to people. Of course our performance also helped, so it was a good mix that helped us.

PFN: The retail investor is not happy with the way equities have performed. When you spoke to your retail investor base about equity investing, what was your approach?

Mr. Reddy: The investor isn’t pleased with equities at this stage after 10 years of mediocre performance. But to be honest with you, we managed to get investors only in the boom time or at times of IPOs and fund launches. To that extent, we weren’t all that successful. In the bear markets especially, we had a difficult time.

PFN: What are your views on SEBI’s decision to impose a ban on the practice of ‘rebating’ by mutual fund distributors?

Mr. Reddy: I am not sure if it was required. To me it seemed like a flexible system depending on the services you wanted to avail. If the investor wanted to avail all the services he would part with the entire load and would not insist on a rebate. But a lot of corporate investors aren’t looking at availing at all the services and used to ask for the rebate.

PFN: What are the key regulatory issues that need to be addressed by SEBI at the earliest?

Mr. Reddy: I think there can be more transparency in the industry.

PFN: Do you think that the mutual fund industry has been able to meet the expectations of investors?

Mr. Reddy: I think that would depend on what is his benchmark for evaluating mutual fund performance. On the equity side if he is looking at equity funds vis-à-vis the index then we have done well. If he is looking at equity funds in absolute terms or against a fixed income instrument then we would not have done so well.

PFN: Any advice for the retail investor as he recovers from yet another meltdown in the markets?

Mr. Reddy: I would advise him to be patient and plan his asset allocation. Consider the factors that we discussed earlier while evaluating funds. Stick to liquid assets, which is what mutual funds provide.

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