There are hoards of small investors whose first major brush with investment has been via the mutual fund and it has not been very great in the last three to five years. Would you agree on that?
Yes, a lot of investors have begun to invest in mutual funds. It is a recent phenomenon. Mutual fund is still in state of infancy but it is still a game of perception. The returns are real, the inflows are real and they get reported every year. In this month, mutual funds got Rs 3,900 crore fund inflow as compared to Rs 9,200 crore last month. This is not perception, this is people writing cheques and money getting debited from their accounts.
The three-year return from Sensex is 5% and three years annualised return of the large cap fund is 3.92%. Yes, it is disappointing, investors expected far higher returns and more so in the kind of funds that they have put in their money — the smallcap and the midcap funds. Many investors try to ride the momentum and it is good that it lasts and in between, get some major blow ups. That is true but in fact, the market has recovered. The earnings have grown and and the market has got into a growth mode. We have not seen our economy in that mode in the last five-six years. The real economy is in the cleaning act. Banks are struggling — 90% of the banking industry is struggling. Who knows? This could well be the turning point if we get out of the pandemic crisis. It has been a crisis and it is disappointing and we do not have alternatives.
What do you think about incentives for fund managers being aligned to their performance?
These are a little misaligned — whether a fund manager does well or poorly, he takes a fee. It is a little aligned in the sense that if a fund manager is able to turn the NAV from 10 to 20, he makes twice as much and if a fund manager turns investors money from Rs 10 to Rs 8, he earns 20% less. So it is aligned but not very strongly. SEBI people have been banging their heads in terms of aligning it more strongly because these are also open end funds.
Also, I feel we need to democratise many ways of channelizing household savings into equity because equity ownership of Indians is absolutely low and there are many vehicles which have been initiated. Some vehicles are not visible today. For example, from the provident fund money, incremental 5% money flows into equity; 10% of all the government employees contribution in NPS flows into equity. This money has come to stay. It is not a kind of money which moves back and forth into the market.
ETFs could be a low cost way but five years back, we had a whole range of low-cost ETFs. We just have one low-cost ETF today because the rest of the ETFs are not even a low cost. Also, it is a chicken and egg story that unless you have a broad supply you will not create the market and till you create the market the efficiencies would not kick in. If you look at the Indian ETF market, in the absence of reasonable kind of investors, it trades at huge premium or discounts. It is weird.
In fact buying ETF in India could be hazardous today except for the Nifty one which is large and it has decent scale. So, there are many ways but at a very fundamental level, if companies do not do well and their stock prices do not go up because the earnings are not going to go up and market has become very narrow. Sensex was propelled by only four stocks in the last three years. So, unless the market broadens– ETF, equity, direct ownership, mutual funds — nothing will help.
The regulator is going to ask investors to put up to 100% margin gradually for the calls they make and curb day trading. In terms of safety, do you think it is time to stop treating retail investors like little children and assuming that they do not know what they are doing?
They should be treated as grown up children and they should be let off. It is dangerous, but there is no other way investors will learn. There is a learning curve to it. People learn, people trade. Our market is far more efficient today — you have Zerodha, Groww, this that, where, without much of friction, you can come on board and start trading.
Leverage was a very dicey thing because it just enabled you to start and it could actually short circuit your route to bankruptcy. I do not think one should curb speculation or one should endorse it. It is good that there is a price that you pay for learning. Every investor starts with Rs 5,000-10,000 and with grand dreams. The moey does multiply and then you lose it and then you understand that what all is going on. It takes time and investing is one area where you do not learn from other people’s mistakes. You have to lose your own money. The earlier you learn, with small amounts of money, the better it is.