The MF industry has been struggling with slower inflows due to weak asset markets for the last couple of years. At the same time, the industry may see structural changes if Sebi raises the minimum net worth requirement for funds. Sundeep Sikka, CEO of Reliance Capital Asset Management and the current chairman of the Association of Mutual Funds in India (Amfi), speaks to Ira Dugal about his outlook for the industry.

What is the environment looking like for the mutual fund industry?

The mutual fund industry is eventually going to be a slave to the underlying asset. What has been happening is that for the last 3-4 years, equities have not been doing well and that has impacted the industry. But the positive thing is that investors are becoming more long term and investments through SIPs are continuing. Last 1-2 years, we certainly haven?t seen strong inflows, but from a qualitative point of view, the industry has evolved. Long-term SIPs are now coming in. We can see greater interest in debt funds, more retail investors are investing in liquid funds. So, while the health of the industry is often measured only in terms of AUMs, qualitatively a lot has changed in the last five years.

Will the pick up in equity markets help spur inflows because often inflows tend to come in closer to the highs rather than vice-versa?

That definitely adds to the positivity but what we have seen in recent years, is that more redemptions come in when markets go up. I think because of the experience of investors over the last 5 years, they have been a little apprehensive. But I remain bullish. I think the growth will come not because of the markets going up but because of the change in investment behaviour and that will be the biggest driver of the industry.

Sebi has been asking MFs to focus more on distribution in cities beyond the top 15 cities. How is that going?

There are three things that are critical for the growth of the industry ? the three Es as I call them. The first is enablers. All the enablers are now in place, whether it is to do with Sebi or other factor. The second is education. At Amfi, we have been trying to conduct education camps and 80% of this is happening in small cities and towns. In addition, various AMCs have adopted districts, voluntarily. The third factor is the environment, which has to do with the performance of the underlying asset classes. All these factors, according to me, are in place. As far as penetration in smaller cities and towns is concerned, what we have been seeing is a rise in flows from these B-15 markets as the industry calls them. The overall contribution is low but the direction is right. More and more ?new folios? are coming from smaller cities and towns.

Amfi has applied to be an SRO for distributors. There are some concerns that there is a conflict of interest…

I can?t share too much on this but Amfi has applied. But it being done via an independent entity with an independent CEO.

The other burning issue for the industry is the debate over the net worth criteria for fund houses. Are you in favour of the proposal to increase the minimum net worth?

There are two different views. One is that the net worth needs to be increased because what R10 crore was in 1996, it is not the same anymore. So just inflation adjusted, net worth probably needs to be higher. The second thought process is that because this is a pass through vehicle, there is no need to increase it. Let more and more entreprenuers come in. I won?t get into the debate around what is the right amount. What I would say is that it?s not like you can run this business with R10 crore. You need a more serious capital commitment for business in this industry. So irrespective of what level the regulators decide on, it?s very clear that you need more than R10 crore to run this business.

At Reliance MF, what are the focus areas?

There are three focus areas for us. One is wealth creation for investors. Second is to become a bigger retail player and how do we expand the market. Third is going to be to increase the overall customer experience. From the wealth creation perspective, we are trying to see that our funds across asset classes are doing well and we are happy to say that across all asset classes ? equity, debt and gold ? our funds are in the top quartile. We want to be seen as a balanced fund house across asset classes because from the investors perspective, the right allocation holds the key.

Some of your flagship schemes haven?t been doing too well? Is that to do with the markets?

It could be because of the markets. But if you look at the 15 schemes, which have a track record of 15 years, they have given an average return of 23%. My point is that tracking one year performance is not going to help. Just by looking at a fund?s performance in the last 1-2 years, you can?t predict what their performance will be in the next two years. So I would say that investors should look at asset managers who have a long-term track record and not just look at short-term volatility. It?s very important to focus on long-term performance. Short-term performance and AUMs ? both are not the right barometers to judge the industry.