Kunal Kapoor, CEO of Morningstar, believes that demonetisation has led to a shift in personal investments to financial assets, and mutual funds have been big gainers.
Kunal Kapoor, CEO of Morningstar, believes that demonetisation has led to a shift in personal investments to financial assets, and mutual funds have been big gainers. He spoke to FE’s Bharadwaj Sharma on various issues of relevance for the mutual fund industry.
One industry that seems to have gained from demonetisation is mutual funds. What is your view?
Last year, we have gone through this cycle of demonetisation. It has shifted more assets into financial markets. Prior to demonetisation, many people were investing in real estate. After demonetisation, the demand for financial assets has really gone up. The mutual fund industry in India is at a tipping point. When things are going well, people also gain interest. This has helped drive the growth in assets. Mutual funds are the answer when you are looking out for returns.
What funds would you recommend to investors?
Which sector is good, which sector works and which doesn’t work is not the best strategy. We believe in building a very diversified portfolio and sticking to it for a long period of time. It is important to understand the time horizon and risk tolerance. Investing is not like gambling, you have to think with that mentality. A one- or two-year theme is a hard proposition. It is always better to have a diversified portfolio. One certainly has the potential to over and underweight it.
What are the future risks to returns?
We are coming through a period of very strong returns. To me, the risk is mostly around the fact that people have unrealistic expectations. Over the next five years, returns that investors achieve will be lower than what they achieved in the last five years. There is a concept of reversion to the mean in the market. Most people have the opposite mentality, they are scared to buy stocks when they are cheap and instead tend to buy stocks when they are rising. In all parts of our life, we love the concept of having a sale. When it comes to investing, it is the opposite.
Expense ratio in India is higher than other markets. What can be done to bring it down?
The expense ratio is definitely higher in India. Ultimately, competition is the best way to help bring the expense ratio down. Transparency is another factor. We think the regulator has done a very good job in India, ensuring that there is lot of transparency. Now the market will have to take care of it. In India, maybe, the markets are not as efficient when compared with other nations. So the ability to generate alpha is a little bit stronger today. So, people will get away with the higher expense ratio. I think 5 to 10 years from now the market is going to be more efficient. The ability to generate alpha will be lower than it is today. And the ability to charge excess fees is unlikely. Today, the expense ratio in India is pretty high as compared to other parts of the world and it is likely that it is going to get compressed. There are also products such as ETFs coming on board which have much lower expenses. The good thing is that investor is the winner in these scenarios.
SIPs have become a big success in India. What is the experience in other markets?
In the US, they are very popular in 41k plan. If you think about it, then it is a great way to invest because you take the emotion out of it. Regardless of whether the market is going up or down, it offers the ability to stick to your portfolio over time. Long-term investment in equity makes sense.
What is Morningstar’s focus in India?
We are focused on offering research around mutual funds and equities, as well as portfolios to help advisors build and monitor portfolios. We also offer asset management services in India.