'We Have A Plan And We Plan To Make A Difference'

Essel Mutual Fund forays into the Asset Management Business With the successful acquisition of Peerless Mutual Fund, Essel Finance has now ventured into the Asset Management business. The Financial Services powerhouse has big plans for this space, and is extremely bullish on the growth of the Mutual Fund industry over the next few years. BW Businessworld caught up with their ED & CEO, Rajiv Shastri for a quick chat on the occasion of their formal launch at The Lalit, New Delhi.

BW: Congratulations on the launch of your Mutual Fund business! What were the key drivers of your decision to foray into this space?
RS. Thank you and it’s great to be a part of this industry! One of the primary reasons why we are excited by this is because we believe that there is space for one larger domestic financial conglomerate with interest that span the financial spectrum. Efforts towards this end started with the commencement of Essel Finance about 4 years ago and today we are present in 7 financial businesses including Business Loans, Home Loans, Investment Banking, Foreign Exchange, Distribution of financial products, Private Equity. A mutual fund is a natural fit in this wider vision.

Another equally important reason is that we believe that the mutual fund industry is at the cusp of explosive growth. If the first Rs 21 trillion took 21 years, the next Rs. 21 trillion may take just 4 years. So, there is a lot to be excited about.

BW: The AMC business in India is heavily skewed towards a clutch of large players, who control the lion’s share of the total AUM. Do you see this as a challenge for new entrants with no past track records to showcase for their funds?
RS: While it is true that the top 5 control more than half the market, it is equally true that 2 of the current top 5 were not in this list 10 years ago. The same is true for the next 5 which also has 2 participants today which weren't in the list 10 years ago. So while their consolidated share remains high and gives the perception of an entry barrier, there is a reasonable amount of churn in their composition.

We are sure that we will see some new names in the top 10 after another 10 years and this is the opportunity that we want to grasp. In doing so, it is extremely likely that we will disrupt established industry norms and practices. This disruption may come in the form of products, services or sales practices, but one thing is certain; we have a plan and we plan to make a difference.

In terms of track record, it is true that the absence of a track record is a hindrance. This is one of the reasons why we chose to acquire Peerless Mutual Fund, which has a good performance track record in its equity as well as debt funds.

BW: Please share your thought process behind the acquisition of Peerless Mutual Fund last year. Considering that Peerless had a small asset base of less than 1,000 Crores, some would say label this an unusual choice…
RS: As mentioned earlier, the performance track record of the schemes of Peerless Mutual Fund was one of the reasons. But this decision was based primarily on the fact that despite its size, Peerless Mutual Fund had a good team in place and functioned in an extremely disciplined and process driven environment. Once again, rather than see it as small, we saw the potential that the combination of these factors offered in conjunction with the strengths of the Essel group in general and Essel Finance in particular.  

BW: What’s your take on the new initiatives announced by SEBI recently? Do you think scheme consolidation will play an important role in de-cluttering the decision-making process for retail investors?
Definitely so. And this reduction in clutter and confusion will enhance investor perception of the Mutual Fund industry's reliability and transparency. Also, consolidation will bring about lower expenses for investors as schemes merge and become larger in size.  
   
BW: There’s been talk of the regulator wanting to further reduce TER’s from current levels. What’s our view on this? Will it impact distribution and/or profitability?
RS: We believe that consolidated cost to investors (fund management plus sales cost, excluding taxes) in India is among the lowest in the world. Our concern is that a further reduction in TER may cause smaller investors to lose access to our products. This will primarily impact those who reside in towns other than the top 15 and would go against the thrust of financial inclusion. But on the other hand, there are ways in which the weighted average cost of investors can be reduced by regulatory intervention. One such example is the scheme consolidation exercise mentioned above, that is already underway.

BW: What’s your distribution strategy going to be for the first couple of years? Do you plan to focus on the direct channel, or will you aim to work with distributors?
RS: As mentioned earlier, distribution strategy is one area where we plan to be different. We are in the process of finalizing these initiatives will launch them at an appropriate time soon.

Also, while direct plans have been gaining ground, a large cross section of direct investors are either institutions or relatively large individual investors who have the wherewithal and the facilities to replace the services of distributors. Investors in smaller towns need to be made aware first. Only time will tell if they will utilize the direct channel for access after they gain awareness. But at the moment evidence suggests that individual investors, especially those who are not investing large amounts, prefer to invest through distributors. So, it is clear to us that distributors are essential to our ability to reach the largest number to investors possible.

BW: Lastly, industry assets have trebled over the past three years. How sustainable do you believe this growth is? Do you seen first-time investors who have entered during this time, holding on maturely in case markets were to go through a tumultuous phase?
RS: To our mind, the question isn't whether the industry will grow, but rather the pace of that growth which as you mention, has been extremely robust in recent years. As mentioned earlier, we believe that the industry will continue to grow rapidly in the coming years and surpass most current estimates. Putting an exact number to this is difficult.

As far as first time investors are concerned, it is true that they have contributed to recent growth as is clear from the jump in the number of folios. Analysis suggests that many of these have come in through the SIP route and this is an extremely important difference in the composition of recent flows. SIP investors, by virtue of having put in place a process that invests regularly in a disciplined manner, are far more resilient to transitory changes in market conditions that one time investors. As such, we expect these investors to not respond in a knee jerk manner to tumultuous markets, were they to happen.