MUMBAI: It takes roughly five minutes of hanging out in the high-stakes investment world for someone to come up with gyan: if you want high returns from the market, take high risks.
But Chandresh Nigam, CEO & MD, Axis Mutual Fund, busts the myth advocating the reverse, i.e., high risk is NOT equal to high returns. “Actually, it’s low risk that gives high returns. That’s where the maximum amount of education needs to happen,” says Nigam, who has been an equities manager for over two decades.
Unlike traditional products like fixed deposits, exactly how much mutual funds, equities, debt products or derivatives return on your investments is simply unpredictable. This isn’t due to investors’ lack of attention or understanding, but because of the product design itself.
“Risk management is integral. If you can reasonably assess and manage quality, price, liquidity, volatility, maturity, credit and interest rate risk, returns will be good. That’s the predictability we want to give,” Nigam explains, as he eases into his chair in a 10-seater conference room at Axis House, Mumbai. Outside, is a vast work area with cubicles, where over 40 professionals are working in library-like silence, partly managing Axis’ average assets under management (AUM) of `57,699.84 crore as on March, 2017.
The fund house started operations seven years ago, just when the money-go-round ground to halt during the 2009 crisis. The timing, otherwise, seems unfortunate, but Nigam says Axis found quality talent and surprisingly, the Indian mutual fund industry was heading north. Being one of the youngest AMCs, it decided to run the show differently considering the low financial literacy levels of retail investors. For instance, it doesn’t offer a sector-fund, or heavily concentrated portfolios. Instead, it offers schemes, where capital is protected, yet allowing investors to participate in the markets.
This product-engineering is crucial for Axis, as retail investors comprise 60 per cent of its total AUM, with institutional investors making up for the rest. Currently, it has 22 lakh investors, but stretching today’s growth to three years, it could more than double to 50 lakh households, says Nigam, who speaks like a tornado, rarely stopping for a moment.
But these are investors, looking for feel-safe products like fixed deposits with predictability. So does it mean zero exposure to equities, known for their high-risk-high-returns? Not really. Like other fund houses, equities exposure is limited to 30 to 35 per cent in a product. But, unlike others that focus on 250-300 stocks, Axis has a selective club of 150 and for a reason. Of the 7,000-odd BSE listed firms, only 1,400 are active, of which, Nigam believes only a few hundred are wealth-creating.
This in effect leads to the industry’s biggest challenge: the investment opportunity itself, which is rather small. India is perhaps the only market, where promoter holdings are probably the highest. Of the $2 trillion market cap for equities, promoters stake (including government) are roughly 55 per cent, which is unlikely to be available in the market.
FIIs hold 22 per cent, and domestic institutions like insurance firms have another 12-13 per cent. That leaves barely 12-13 per cent of free-floating stock. If you exclude stocks that aren’t dematerialized, the opportunity is $100 billion, or less. If SIPs are to grow from the current `5,500 crore to `7,000 crore this year, deploying it won’t be easy.
“It’s leading to high valuations, and we need to ensure that reasonable liquidity is available for retail investors,” he says proposing, “Perhaps, something like minimum public holding (MPF) in equities of 25 per cent should be allowed.”
Currently, mutual funds comprise less than one-tenth of total wealth products. They picked up in the last 18 months, reaching a tipping point of 1.3x growth every month. Interestingly, 60 per cent of the SIPs are continuing for the last five years. “We haven’t seen this kind of consumer behaviour,” says Nigam.
Though fund houses achieved some kind of a critical mass and product acceptance is fairly decent, further penetration remains the last piece of the puzzle, with just 3 per cent households exposed to markets. If more were to join, predictability, objectively designed processes, and products with low risk but reasonable returns are required. But the bottom line is, one cannot take ‘risk’ out of markets.
“The question is whether you can handle things when they go wrong. We have to figure out what is the risk range, risk predictability, then how much position do I have,” he explains citing an example so fast that, at first the numbers seem crisp, but you lose him soon. Perhaps understanding the predicament, he reaches out to the display board writing numbers, percentages, growth with equal speed, that they start to make sense. He sums up: “Don’t even take your own internal assessments as gospel and truth. You have to accept that things will go wrong, irrespective of whoever says what.”
It was at the end of the one-hour conversation, Nigam instills a rare sense of camaraderie. “When you are making a movie, or business, it’s fascinating for everyone to say, I want to provide something that’s truly ‘differentiating.’ In our case, I’ve given enough material to say we are truly differentiating,” he breaks into a chortle.