'Investors' risk appetite is gradually returning'

The mutual fund industry has come for some serious criticism in the recent past. The reason: It has completely missed the stock market rally that started from early March and has given returns of over 70 per cent to investors. Madhusudan Kela, head (equities), Reliance Mutual Fund, which has the highest average assets under management and investor base, speaks to Palak Shah and explains why fund houses are being judged unfairly. Excerpts:

Last year, fund houses faced a lot of criticism because they went overboard with their exposures in certain risky sectors. Even in the recent rally, fund houses have been simply sitting on cash. Is there a case that fund houses are unable to read markets correctly?

It would be wrong to say that the mutual fund industry, especially Reliance Mutual Fund, has missed the recent rally. The problem is that even when we are investing in Nifty futures, it is deemed as sitting on cash. Most fund houses do not have more than 15 per cent in cash. While it can be said that majority of the fund houses have not been able to maximise their returns from the recent rally, labelling them as complete failures would be too much of an exaggeration.
Mutual fund returns should not be judged on a month-on-month basis. While schemes have underperformed the stock market for sometime, it is the only vehicle in which investors have not suffered huge losses. In fact, some could be sitting even on decent returns. Those, who have been regularly investing in the past one year, have got better average returns than bank deposits. Even the net asset values (NAVs) of various Reliance schemes have moved up significantly in the recent rally.

Do you think there are enough hedging tools available for funds to minimise risk during rising as well as falling markets?

For instance, mutual funds don’t make good use of the options segment. Is there a reluctance to pay high premium?There is no level playing field for mutual funds compared to foreign institutional investors (FIIs). The rules for FIIs are far more liberal. The only tool available for funds is to short sell Nifty futures. There is no reluctance to pay the premium for options. But at an individual level, investors have to shell out only 10 per cent margin. Funds, on the other hand, have to make a provision for the entire position. As a result, there isn’t enough leverage available and hence, not many funds take huge positions in this segment.

What is the average churning ratio of your portfolio? Is there any intra-day trading involved too?

The churning of portfolio at Reliance Mutual Fund is very little. Most of the schemes hold stocks for three to five years. However, when faced with extreme situations like in 2008, it becomes necessary to find defensive stocks and switch over to reduce risk. Most of the intra-day trades are only in the futures segment.

After the Satyam fraud, there were talks that the mutual fund industry was planning to make the due diligence process much more stringent. There were also reports that extreme steps like shunning companies with a bad track record were on the anvil. Has the industry reached any consensus?

I can only say that the due diligence has increased after the Satyam scam. The industry has become more vigilant and decided to be more proactive in approaching authorities against errant companies.

The recent rally has been quite frenzied though the fact remains that the world economy is still not out of woods. Economic problems in the US and Europe continue to persist. Do you think that there is a decoupling of the Indian market from the other world markets?

The emerging markets, especially India, will be decoupled from the US and European markets for a while. In fact, the situation in India would start improving significantly after the decisive mandate to the United Progressive Alliance (UPA) because it would give the government a lot of freedom to act without any pressure.
While the economic recovery might be slower-than-expected by markets, the demand in economy will not fall too significantly. Reforms will be able revive our economy.

Has the investor’s risk appetite changed in recent times? What are the sectors you are bullish on?

The investor’s risk appetite is gradually changing. Our fund house has followed a strategy to maintain across the sector themes to increase investor base. We believe that the sectors that are driven by domestic demand would do extremely well. But specifically, we are bullish on infrastructure and power sectors. I also believe that the pharmaceutical sector also would do well.

Source: http://www.business-standard.com/india/news/%5Cinvestors%5C-risk-appetite-is-gradually-returning%5C/359803/

Battle to build up assets is a bad idea in this market: UK Sinha

He could be termed the angry gentleman of the mutual fund industry. UK Sinha, chairman and managing director of Unit Trust of India is not known to mince words. In a free wheeling interview with ET, he does not flinch from criticising the unhealthy industry practices that have again surfaced, following the recovery in the markets. At the same time, he is supportive of equity fund managers’ cautious approach during the recent rally, even if it meant missing out on returns. Mr Sinha is upset about the fact that current regulations give an unfair advantage to insurance companies when it comes to mobilising funds.

Has the mutual fund industry learnt its lessons from the meltdown (in the money market segment ) of October 2008?
I wish the lessons had been learnt. But I don’t think so that has been the case. The support provided by the government and RBI in October (2008) was in the context of the larger financial system, and not to bail out any particular scheme or any particular mutual fund. The lessons that mutual funds should have learnt from this turmoil is: not to grow assets (under management) at any cost and not to invest in low quality paper. Till around December, the industry was cautious. After that the old practices have begun. Fund managers are again buying assets (under management) — they are paying distributors and corporates to buy assets — there are stories of how structured deals are happening once again.

What is the solution to these problems?
Sebi is already asking for more disclosures, but these (disclosures ) have to be made more stringent. Details such as how much of group (companies’ ) money has been invested , who are the investors, how much of it is retail money and how much of it corporate, have to be made. Also, what are the type of papers the scheme has invested in..... that disclosure is not happening on a regular basis. Sebi should also see if the investments being made are in line with the objectives of the scheme. My next point is that the growth we are seeing of late has mostly come from corporates and banks. I don’t think the growth is on sound lines. Retail money is still not coming in, and the whole industry has to work towards it seriously.
You mentioned that MFs are once again becoming aggressive. But there is also evidence that they are becoming over cautious, at least where equity is concerned . For instance, most equity schemes missed out on the recent rally by choosing to stay in cash. If fund managers have been cautious in their equity investments , I will defend it. Because since its bottom in March, the market has gone up 70%. I would be uncomfortable with such a swift rally in such a short time. If you look at the last 14-15 years, there have been 4-5 bull rallies. If you divide the rise (in indices) by the number of trading days, the average growth (per day) works out between 0.2% and 0.4%. In the latest rally, it has already crossed 0.7%. So if a fund manager is being cautious, I would think he is doing the right thing. Maybe, he should communicate his views to the investor. If a mutual fund investor expects 70% returns in eight weeks, he is better off investing by himself, he should not expect that from a mutual fund.
There is a perception that the mutual fund industry is fast ceding ground to the new crop of private insurance companies, in terms of asset mobilisation.
The problem is that the difference between a mutual fund and an insurance product has narrowed down considerably . The insurance industry is now selling more and more of investment products — very small component of insurance and very large component of investment, be it children’s plan, pension plan, ULIPs. But the rules of the game for MFs and insurance companies are different, be it disclosures, publicity, guaranteed returns, commission structure and KYC requirements. Different rules for different products are acceptable, but not different rules for the same products.
The mutual fund industry is in deep trouble because of this. If a mutual fund makes a claim, we also have to mention that ‘past performance is no guarantee of future returns.’ We cannot offer assured returns , we cannot get a celebrity to endorse our products. KYC rules are more stringent for investments in mutual funds, than for those in insurance products, or while opening a bank account. PAN card is a must for even mutual fund investment worth Rs 5 while it is not needed for investing up to Rs 50,000 in insurance products. It is hard to appreciate the assumption that people with doubtful intentions (referring to terrorists and money launders) invest only in mutual funds and not in insurance products , or that they do not open bank accounts.

Are you hopeful that the regulators will do something about this anomaly?

Maybe they will. In Budget 2008, the finance minister had announced that KYC requirements would be made uniform across all categories of financial products. That has not happened till now. Why?
Insurance companies claim that mutual funds are now paying the price for not having built their distribution network beyond the top tier cities.
I agree with that. That is the reason why UTI is still looking to expand its reach despite having a presence in most major districts. From 71 branches last year, we are up to 139 branches now and looking to add another 50 branches by the end of this financial year. But it is a fact that the industry in general has not tried to reach out to investors, and was content with a presence in the top eight cities.

How has been the response to the micro-pension offerings of UTI? Are you satisfied with it?
No. I had thought it would be a big success. That has not been the case. We had invested lot of our time and money in to it. But we have barely crossed Rs 1.25 lakh in the last three years. I was expecting a much larger participation.

Will you continue to promote this product?
Yes I will. We are seeing some minor successes. The problem is that there is not enough awareness about pension products. My complain is not against the low income background. My complain is against people having a reasonable income, and who are part of the organised sector. Even they are not going for it on a voluntary basis.

Source: http://economictimes.indiatimes.com/Opinion/Interviews/Battle-to-build-up-assets-is-a-bad-idea-in-this-market-UK-Sinha-/articleshow/4601925.cms?curpg=2