Risk-reward ratio in favour of debt schemes: Saurabh Nanavati

Indian Mutual Fund industry has failed to attract retail investors and situation does not seem to be improving. Despite several efforts from the regulator and the industry body Amfi, fund houses continue to find it hard to bring in retail money. Saurabh Nanavati, chief executive officer, Religare Mutual Fund, talks about fundamental problems plaguing the industry. He says that it's better to have less investors but with right reasons. Edited excerpts from a conversation with Chandan Kishore Kant

Why is the industry unable to attract retail money?
Combination of factors is keeping retail away. We have very low level of financial literacy and this continues to worry in such volatile market conditions. Fundamentally, retail in India has always been taught that one should enter markets at times of initial public offers for equities or new fund offers in mutual funds at Rs 10 per unit or share and on listing, sell it. That's not right. Investors should fundamentally buy into a stock or a mutual fund because of the past track record, if convinced about the theme. Secondly, stay invested for a longer period. If one keeps doing ins and outs, I don’t think it is a good strategy to be adopted.

When do you expect retail investors to come back to equities?
There is a big difference from investors' perspective. In 2008, deposit rates were five-six per cent and people yet came back to the equity markets in 2009 for a short span. However, right now, coming to equities is not in favour of retail. Unless, fixed deposit rates come at least below eight per cent - a trigger point, it's hard to see retail coming back to equities. Safe return of 8-8.5 per cent is a big psychologically benchmark in retail investors' mind-set.

What went wrong? Are lessons learnt now?
Money is there with people, no doubt about it. However, statistics show that fresh money is fundamentally received through new launches. In other competitive financial products too, half of the folios or policies are getting lapsed after three years. Why? Because they have been wrongly sold. These are serious issues. The regulator is playing its role and we as a industry need to play our role. What I believe as an asset manager is, it's better to have two investors coming in for a right reason than 10 investors coming for a wrong reason. Else, we are not building up a good base. Unfortunately, we have never spoken about it for past years in our markets, both equity and mutual funds. We will go through these years of pain, which is a transition phase, before we see brighter future and investors come with a right reason.

Investors in equity mutual funds are not making money. Is debt category getting dominant?
True. Even, people investing through SIPs for last five years are making negative returns. This way, retail investors will not have confidence. On the other hand, with 10 per cent return in banks' fixed deposits, why would he take risk by investing in equities? In current scenario, equities may promise 12 per cent positive returns as well as negative returns too. The risk-reward-ratio is clearly in favour of debt schemes and FDs, that’s why last two year’s retail has been systematically moving towards debt. Clearly, debt is a no brainer for the Indian investors at this point of time.

How do you see this year panning out for the mutual fund industry?
Next one year is going to be tough. Last two months were probably the worst months and the trend is yet on the decline. It definitely looks like this slowdown will continue for at least next six months, both from the markets' perspective as well as clients' perspective. We are grappling with lot of regulatory changes, which have come up in a short span of time. This has thrown the industry's and the distributors’ business model out of gear in terms of acclimatising to new norms. Most important is what course of action our government takes on policy decisions.

Source: http://www.business-standard.com/india/news/risk-reward-ratio-in-favourdebt-schemes-saurabh-nanavati/462239/

Silence is a virtue for MFs

Like the average Indian citizen, mutual funds have a view on everything but do not take the effort to make it count by voting. The abysmal voting record of Rs 7 lakh crore Indian mutual fund industry has come to the fore in an analysis by Institutional Investors Advisory Services (IIAS).

An analysis of voting pattern of the 41 asset management companies (AMCs) whose voting patterns were reviewed, 11 have either completely abstained or not voted on any shareholder resolution in FY11. Of the remaining 30 AMCs, several voted only on a sub-set of resolutions put forth to shareholders for approval.

Of around 3,600 annual/ extra-ordinary general meetings (AGM/EGM)/ Postal ballots/ Court convened meetings voted by the mutual fund houses, over 61 per cent of the time fund houses abstained votes, 38 per cent of the time they voted ‘for’ the proposals put up, and the remainder (less than one per cent of the votes cast) were ‘against’ the proposals put forth for shareholder approvals.

UTI Asset Management, HDFC Asset Management and Morgan Stanley are the only fund houses to have voted against in the AGM. In EGM and postal ballots, foreign fund houses Fidelity and Franklin Templeton were active with eight votes each against key resolutions.

“A welcome beginning has been made,” said Amit Tandon, managing director, IIAS. “While funds have begun to vote, they now need to add more muscle to their voting.” he added.

IIAS found fund houses had voted for or abstained from voting even in a number of shareholder-unfriendly resolutions. For example, most fund houses abstained or voted for in the resolution on the proposed sale of Piramal Healthcare’s domestic formulations business to Abbot.

According to IIAS, “The slump sale instead of a demerger, restricted the cash pile to Piramal while increasing tax burden.” Similarly, fund houses did not demonstrate their concerns through votes in remuneration of promoters of Sun TV, issue of warrants to a promoter entity of Apollo Hospitals and reappointment of auditors in Hindalco, the agency said.

The AMCs cite a number of reasons for voting with the management. Many are of the opinion that they do not have the required percentage of votes to have a resolution against the management to be passed. Some are also of the opinion that this might limit their access to the corporate’s management and other legitimate requests for information required for investment analysis, thereby adversely affecting their business relationships with corporates.

“We are not arguing that investors become activist. But, it is important for investors to clearly spell out where they stand on issues, be it executive compensation, dilution, unbridled borrowings, mergers with unlisted companies, and a host of issues where the interests of institutional investors diverges from that of ‘promoter shareholders’,” the IIAS report said.

According to the agency, the most effective way of conveying this is not a one-on-one conversation but a shareholder meeting. “After all, the investors owe it to themselves that their voice be heard. But the investors also have a fiduciary responsibility, which will be fulfilled only if their vote is counted,” it said.

Source: http://www.business-standard.com/india/news/silence-isvirtue-for-mfs/462236/