A mutual fund can't beat its benchmark in the short term: Sandesh Kirkire, Kotak Mahindra MF

With an AUM of nearly Rs 26,000 crore, Kotak Mahindra Mutual Fund is the 10th largest fund house in India. Its CEO Sandesh Kirkire tells Babar Zaidi why funds must outperform their benchmarks, why some funds need to be merged and why the NPS has not taken off.

Sebi has expressed concern over the underperformance of some equity schemes and plans to question the fund houses. Has the regulator overstepped its mandate?
I'm not sure what kind of questioning the regulator has in mind, but highlighting this issue is certainly important. The performance of a fund is linked to its benchmark index. As a fund house, it is our responsibility to generate alpha compared with the underlying benchmark over a reasonable period. If you look at the assets under management, not the number of schemes, almost two-thirds of the assets managed by the domestic mutual funds have outperformed their benchmarks. This is a good achievement when one compares it with the developed markets, where a large number of schemes underperform their benchmarks.

A lot of people continue to remain invested in funds even if they underperform for extended periods. How long should one wait before exiting a fund?
One should not expect a fund to outperform its index in the short term. Give a fund manager at least 1-2 years to generate that extra return. That's the minimum time he would require to make a fund perform better than its benchmark. If he is not able to beat the benchmark even after 4-8 quarters, it's time to start asking whether one should continue with the fund or switch to a better performing scheme.

Last year, you had merged the Kotak Lifestyle Fund, which was performing poorly, with the Kotak Select Focus Fund. Should the underperforming funds be merged with schemes that are doing well?
We merged the two because we found that some of the thematic schemes were unable to generate alpha compared with the underlying diversified broader market index. When these thematic schemes were launched, they did very well, but later their performance became volatile, which made investors nervous. So we gave investors the option to exit the fund and merged it with a diversified scheme. Today, most of our funds are diversified.

Kotak Mutual Fund is one of the six fund houses managing the New Pension Scheme (NPS) funds, but it has not managed to attract many investors. How can it become the investment vehicle of choice for retirement planning?
NPS as a product is the finest in the world in terms of cost. Unfortunately, unless financial literacy rises in India, the product will not do well. The NPS needs to have a pull to attract investors the way that the PPF does—investment and interest earned are tax-free.

What was the need to create this complicated structure? Couldn't the fund houses have come up with a similar product?
The big challenge in the pension space is that investors don't know when to change their asset allocation. Mutual funds could have created such products, but asset allocation would have been the investors' decision. Given the low level of financial literacy in the country, the NPS lays down a precise formula, taking into account the age of the investor.

The default option of the scheme continually changes the asset allocation as the investor grows older. By the time you are 60, your total exposure to volatile markets comes down. Besides, in a mutual fund, the distribution cost is the largest component of the total cost structure. A mutual fund will find it difficult to operate a scheme on the cost structure of the NPS.

Talking of costs, there is talk of the entry load on mutual funds making a comeback. How can this impact the industry, the distributors and the investors?
The discussions are under way, so I will not be able to comment on this. The focus is on increasing retail participation in the capital markets and this is best done through mutual funds. So it is not only about the commercials of the industry, but also about the tax incentives that are available. A combination of the two, as well as an improvement in the capital markets, will bring back the retail investor.

Five years ago, in 2007, people were overly enthusiastic to invest in the equity markets. The total net investment in the markets by domestic funds and insurance companies exceeded the FII inflow during 2007-8. Today, even though the markets are 50% cheaper in terms of valuations, the investors are questioning the growth prospects and valuations.

Critics say that corporate investors are the focus of fund houses because they invest far bigger amounts than retail investors. How valid is this charge?
This is a myth. Less than 5% of the mutual fund workforce is involved in institutional selling, which means that 95% of the sales force is focusing on retail investors. Corporate money will continue to come because of the ease of investment in the money markets through mutual funds. Secondly, the revenue potential of the products that corporates invest in is one-tenth of that earned from the products sold to retail investors.

Unlike institutional investors, retail investors typically come with a long-term investment horizon, whether it is in income funds or equity funds. Since these schemes are able to deliver higher returns, the fund house can charge a higher fee from the investor.

Source: http://economictimes.indiatimes.com/opinion/interviews/a-mutual-fund-cant-beat-its-benchmark-in-the-short-term-sandesh-kirkire-kotak-mahindra-mf/articleshow/15078334.cms?curpg=2