A lot of numbers from June when the mutual fund inflows have gone down, show many short term discrepancies at play. This trend will reverse in the future and mutual fund inflows will start again and direct investment into equity will continue to grow as well, says the Co-Founder & CIO, Zerodha.
Are you seeing any change in perception taking place and is it advantage investors who want to now come in directly and cut out the middlemen?
As long as the investors are coming into the market — be it from the mutual fund or direct equity investment — for a country with a population like ours, the equity markets are under penetrated. It is good if they come in through mutual funda and it is also good if they come in directly. I do not think one industry necessarily competes with the other. The goal is to grow the pie together and have increased participation amongst the retail investors of India.
Agreed that is fantastic message as long as the money is coming into equity markets, but we are talking about investors who are wondering whether it makes sense to remain in mutual funds or come in directly. Most investors are not thinking whether they are contributing to the equity markets and deepening them one way or the other. They are focussed on returns. Do you think retail investors are getting cheesed off with mutual funds?
Over the last decade or two, for the asset management industry as a whole — not just in India, but across the world — the models have changed. You have statutory fees that you pay immaterial of how well or how badly your fund manager does. We have too many distributors and too many middlemen selling products. A lot has to change to make this industry more efficient. The incumbent fund houses in India have been a little averse to starting great ETF products because it takes away the earnings and revenues from existing products which might offer a bigger margin for a distributor.
So a lot has to change in asset management. I would say client aligned models are the need of the hour, wherein a fund manager or a fund house benefits depending on how well they perform and they do not have a common fee which they charge on years when they do well and when they do not do well as well. So a lot has to change.
I do not think that in terms of the money being allocated to equity market, the route a retail investor might take has changed structurally. A lot of numbers from June when the mutual fund inflows have gone down, show many short term discrepancies at play. This trend will reverse in the future and mutual fund inflows will start again and direct investment into equity will continue to grow as well. But the onus is on the asset management industry in India to make a product which is more efficient and more suitable today than the incumbent products and fund managers we have in the industry.
Which is safer? There is no way to know the exact figures though a lot of people possibly have now decided that let us make a go at it ourselves. Mutual funds were always supposed to be the vehicle for those who did not have the knowhow or the time to track the markets very closely. Now a lot of people are doing it themselves. Is it a DIY phase? Is that a little dangerous where investors can get burnt? There may be a greater upside but then a bigger downside as well?
There are two ways to look at this. If you go back in time and look at the history of investment, there is a case to be made that passive investing has done better than active investing or a fund manager managing your money. There is a case for the other side as well. In terms of retail investors coming into the market directly, the ones who are doing it by virtue of investing in largecap blue chip companies, are kind of okay and at some level.
The regulator or Sebi seems to be one step ahead throughout the pandemic and they saw that a lot of retail investors were coming in and using leverage as a product to enter. Two days ago they came out with the new circular which kind of rationalises the amount of leverage available for a retail investor to trade and transact in securities. I think this will make the market a bit more stable. It will happen in a phased manner, starting in a couple of months. But it will go a long way in making the markets more stable and robust in the long term.