With rise in markets and investor sentiments, the mutual fund industry saw its AUM cross the Rs 10 lakh crore mark. Sundeep Sikka, chairman AMFI and CEO of Reliance Mutual Fund told Sandeep Singh that the industry is in a sweet spot and is set to benefit from growth in the economy. Hoping to double AUM in the next five years, the industry is, however, looking for some favourable announcements in the upcoming Budget. Excerpts:
The industry AUM crossed Rs 10 lakh crore in May, how do you see things shape up from here and will there be pressure on account of profit booking?
As an industry we are happy that we have crossed Rs 10 lakh crore assets under management (AUM) mark. Over the last three to four years there was a decline in financial assets and more investments were going into gold and real estate as people were looking to get into safe havens. However, with a change in government and positive sentiment coming in, we have seen investors returning to capital markets. While they got into debt funds over the last two years, now a lot of them who were sitting on the sidelines are getting into equities through mutual fund schemes. The average annual return of the equity schemes across the industry over the last 15 years has been 21 per cent as against a 12 per cent CAGR of Sensex and that shows the potential of mutual funds. As equity returns improve, I am confident that more and more investors will come in. Investors were waiting for a positive trigger which has come in the form of change in the government.
While rise in sentiments have turned things around, how do you see Sebi’s initiatives over the years benefit the industry?
While the markets needed a positive trigger to lift investor sentiment, the tireless efforts put in by the regulator over the last few years will certainly have its impact. Easing of KYC norms and higher focus and push beyond top 15 cities is having a big impact in terms of inflow of retail investors. Coming out with a long term MF policy, steps on investor education and allowing mutual funds to utilise 2 basis points of their total expense ratio for investor education and awareness programme along with other initiatives are working for the growth of the MF sector. Sebi’s move on proxy voting has resulted in mutual funds playing a role in enforcing better corporate governance practices and safeguard minority shareholders interest. Implementation of better practices has also resulted in 40 per cent drop in investor complaints over the last one year.
What is the biggest factor working in your favour and how do you see growth for the industry?
The biggest factors are growth in the economy and rising income levels. We are heading towards 8-9 per cent growth rate and with that there will be rise in income levels. The surplus income leads to higher savings which will be a big booster for the sector. Today, as a country we are a $2 trillion economy, the household savings is about $600 billion and MF industry is $165 billion (Rs 10 lakh crore). If the $2 trillion economy grows to $4 trillion in next five years, I am hopeful that the industry will grow from Rs 10 lakh crore to Rs 20 lakh crore. And if the number of people investing grows from 2 per cent to 3 per cent then Rs 20 lakh crore can even become Rs 30 lakh crore.
Have you proposed any benefits for mutual funds in the upcoming Budget?
We have proposed a few things. We have asked for a separate window to be created for ELSS. While Rs 1 lakh window under Section 80C in itself is a low amount, the space is too cluttered. We also want the mutual funds be included along with tax-fee bonds of NHAI and REC for tax benefits available on capital gains under Section 54EC. We also are looking at how to get long-term pension or retirement product similar to the 401(K) in the US.
The government seems to be going for fiscal consolidation and in the process is looking to take tough decisions — like the railway fare hike. How do you see this?
Any decision that is good for the country in the long term and helps bring down the fiscal deficit will be seen as a positive development as it will be good for retail investors in the long run. Issues of inflation and fiscal deficit need to be addressed. While I do not want to dwell into how the fare rise will impact passengers, from the capital markets point of view, as long as the fiscal deficit of the country comes down, it is a big positive.
In May we saw the highest monthly net inflow into equity funds over the last three years. Do you think it will continue?
We have seen the return of high net worth, affluent class and also retail investors coming back towards equities. I think it is the beginning and the positive sentiment is bringing the India story out. I would not say that this month would be better than the previous one but overall we see the trend improving. It takes some time to get the momentum going but as experiences improve, investors will act as our brand ambassadors and we will see strong inflow into equities. The SIPs have been on a rise and currently there are over 70 lakh investors putting their money into equities through the SIP route.
We have seen in the past that when equities do well the industry puts debt on the backburner. Is that something that will not happen this time?
Between 2003 and 2008, retail investors saw mutual funds only from the equity point of view. What has happened over the last few years is that we have positioned ourselves as complete wealth creation avenue and have products across all asset classes—debt, equity, gold etc. I think we are in a sweet spot and have opportunity to grow both in equities and debt.
While the industry held back on expansion plans, do you see people embarking in it now?
We have to see how technology can be used and how the PSU bank network is utilised to its maximum potential. It is not a question of opening branches, it is more important to have more points of sale and more points of servicing. Presently, there are a lakh distributors working for us, a higher growth can see this number multiply many times. As the industry grows the industry is committed to create wealth for retail investors and also create lots of employment opportunities for distributors.