Secondary market for mutual funds needs to be developed

Written by Akash Joshi | Updated: Jan 30 2010, 04:36am hrs
Heavy inflows from the equity funds and structural changes have impacted the mutual fund industry in the interim. This has, therefore, prompted players to think differently and innovate. Ashu Suyash, MD & country head, Fidelity International, spoke with Akash Joshi of The Financial Express about the impact on the industry and how they are coping up with the situation. Excerpts.

We have seen several changes in the industry, the commission structures being changed and now the low inflows into the equity funds. How do you see this shaping up

The mutual fund industry has been wholesale distribution and now we see that there is a huge disinterest in the distribution community. In other markets, other than India, there are distribution norms that are being re-worked and the regulators are saying that they would give two or three years for the industry to realign. Here, we went ahead and implemented these norms.

So now given this, we are looking at seeing to it that communication and service do not suffer and we have invested heavily on our service infrastructure and building communication. When distribution is disinterested then the end-customers are not going to receive as much service. Clearly as a result of this move, in the interim, the end-customers are still coming to grips with this move. And this is one big reason for not seeing as inflows coming into the industry as they should have.

If one looks at it 2009, it was one of the best years for the stock market. And in this year we saw, on a net basis, only Rs 1,000 crore coming in which is very small considering the size on potential of the market.

And at the same time we have had several discussions over tax codes and say that we have dealt with this. However, the uncertainty element is out there. One does not know what the paradigm would down the line. And the third thing is that when change happens and it is common across investment products then it's fine. Here, every thing about mutual funds has got implemented but other instruments, whether it is unit linked plans or structured products, it's the old order that continues. When I look at it from a customer perspective, then they only get to see change in mutual funds. Why can't we have common standards and I am thinking that when the underlying, the market linked instruments, are the same, then the same customers have different experiences. So given this, we have stepped up our investment education programmes.

How is your new product development coming up

We have not done new schemes for almost two years and we believe when things realign, it will be better for the long-term. So we have looked at bringing in products that are differentiated in the market place. And its not a case of these products will over take the existing ones.

What is the theme that you are looking at

If one looks at the market and not just India but globally, last year was a come back for equities and we still believe that there is still lot left here. Our view on fixed income is rather cautious and there would be a time when action would be taken on the interest rates, it's difficult to tell when. And then there is a recovery that sets in, it's difficult to say, especially, countries other than China and India. Then again there is the inflation factor that has caught up and the government will have to walk a tight rope between managing the inflation and growth. And obviously, in this, the commodities will do well. When recovery picks up, the commodity prices will rise. So, we are looking at gaining from the rise at the materials and the commodities sector. Therefore, we looked at a pilot project for the global real assets segment and the London office seeded it.

If you wanted to look at taking an exposure to the commodity segment, as a retail investor you have very limited means to take an exposure. Say you want to get an exposure to gold, it has a problem with liquidity and the ETFs don't track the commodity prices that well. And then you look at investing in securities, say a mining company, India has only one. Moreover, say what happens when gold starts underperforming. Most of the investors cannot take these calls. So we have built our thought over this.

How would you look at real assets, especially the real estate sector and other commodities

Property would be a segment and the route to that would be through the securities and not real properties. And we will be looking at global assets so we would look at what gets the investors the best buck - say it's a DLF or its some company in China. The best plays in real assets are not in India and China. Say you want to have a play in oil, then ONGC would be the choice. But its results are decided, to a great extent, by government policies. But if you were to buy an Exxon Mobil, then you have a better chance to riding the oil price play. And if you tracked oil prices and Exxon Mobil, our researchers saw that the price of Exxon did not rise as much when the oil price rose, but actually later. We saw that it had $40 billion in cash and therefore it was safer than some of the banks at the end of the crisis. If you locked at yourself to India, you might not get diversification nor would you get a play on the global movements. Now, even look at agricultural plays. Where do we, in India, have an exposure to this play Those are the stocks that are listed outside of India. We also believe that there is a huge opportunity in platinum as the gold prices have overshot. And again, where do we have an exposure to companies that would gain from this. Then there are developments in the steel sector and the cement sector and there is far more action happening in China, so why have an exposure to India only.

There has been a move to list all close-ended funds. What is your take on this one

The move to allow brokers to trade in mutual funds is definitely a welcome move. Moreover, you need to offer an exit for investors as closed ended funds should remain closed ended. Then the secondary market is the best route and this is being followed globally as well. However, in India we don't have a vibrant secondary market even for bonds, so having one for mutual funds would also be a challenge. Yes, market makers would work, but we have a long way to go on developing the secondary markets. The secondary markets for equities, however has come a long way and is of global standards.