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"We are a customer-centric mutual fund"

Apr 18, 2000

Suraj Mishra, Vice President Marketing and Sales at Prudential-ICICI Asset Management Company, is a tech-savvy man. After majoring in finance from the University of District of Columbia, Washington, he put in stints in the Bank of Credit & Commerce International, Washington D.C., World Bank, Banque National de Paris, Bombay, Kotak Securities, Templeton Asset Management Company and ING Bank.

In an interview to equitymaster.com, Suraj Mishra, Vice President Marketing and Sales, Pru-ICICI, spoke at length about the marketing trends in the mutual fund industry, how private funds stack up against UTI and Prudential ICICI's philosophy.

EQM: The last few months have seen a large number of growth schemes IPOs with income scheme IPOs drying up. Could you comment on this?

Mr. Mishra: First let me give you a background about the industry scenario. Earlier during the Harshad Mehta times with the crash in the stock markets, the industry was not ready for equity schemes. So most of the schemes on the scene were income schemes, as the industry did not have an appetite for growth schemes. But with a turnaround in the fortunes of the stock markets, growth schemes are being launched with increasing frequency. But we haven't seen the end of income schemes as yet. With the onset of other developments like derivates, pension plans we could see more income schemes being launched in future.

EQM: What is the break-up of funds flowing in Prudential-ICICI MF in terms of retail and corporates?

Mr. Mishra: That differs from scheme to scheme. For instance, our Income Scheme has 60% participation from corporates and the balance from retail investors. However, in the growth fund, 96% of the assets are accounted for by retail investors, while corporates account for only 4%.

EQM: Last year the MF industry benefited in a big way from the technology boom, and some concessions in the Union budget like tax-free dividends. If some of these factors were to be neutralised, do you still believe that the industry will perform well in this year?

Mr. Mishra: One thing we have realised is that with the excellent performance of the mutual fund industry last year, managing expectations in this year and the following years will not be an easy task. Coming to the specifics, a lot of people believe that dividend tax was one of the best things to happen to the industry. (With the imposition of dividend tax, dividends are tax-free in the hands of investors, and the mutual fund has to pay a tax on dividend payout.) For instance, dividends from income funds were charged at 10% plus 1% surcharge making it 11%. Add to this the fact that income funds were treated as a capital asset and were taxed at 20% in case of capital gains. So while earlier inflows in income funds were of long term in nature, with the imposition of dividend tax even short-term inflows started pouring in income funds.

EQM: So the imposition of dividend tax played an instrumental role in boosting inflows….

Mr. Mishra: The rise in inflows can not be attributed totally to the imposition of dividend tax. One must also look at the comparative products at the investor's disposal. The investor had bank deposits, money market and liquid funds, all of which were taxed. Among all these avenues of investment it is only the bank deposit, which offered surety of returns in terms of interest. The other investment avenues like money market and liquid funds do not offer surety of returns as there is considerable interest rate risk, which can affect returns. So the investor investing in these (income) funds, is taking considerable risk, unlike an investor who has placed some money in the bank deposit. For instance last month, every investor who had invested in an income fund lost money, while in a bank deposit you never lose money. Therefore, the investor who has placed his money in the income fund was rewarded with the dividend tax. In effect this was his reward for the higher risk that he takes.

Therefore we have witnessed considerable shift from bank deposits to income funds. This did not go down well with the banks, which is why the dividend tax has been increased from 10% to 20% (plus a 10% surcharge) on income funds in the latest budget.

Of course, with dividends becoming tax-free, other problems have afflicted the industry like dividend stripping. In any industry there are men and there are boys. The boys play their dirty games because they have the short term in mind, while we look at the long term. Section 54EA/EB was withdrawn because of the games played by the boys. And if the boys continue to behave as they have been behaving, I see some bad times for us, unfortunately the entire industry will witness bad times.

EQM: Are mutual fund (MF) sub-brokers and agents in the country well-educated? Have they understood the product themselves, before they explain it to the end-investor?

Mr. Mishra: We understand that sub-brokers/agents in the country are not geared to comprehend mutual fund products. In fact, we recognised earlier on the need to educate sub-brokers in the country. That is why when Prudential ICICI MF was initially launched in the five metros, we ensured that there was a learning center in each of these metros, something like a community learning center. Even later when we launched our investment centers in the smaller towns and cities, we ensured that there were learning centers in most of these towns. We made an attempt to educate the sub-brokers about MFs beginning from very fundamental concepts like the RBI, SEBI, before we moved on to mutual fund products per se.

At current level, I would say sub-brokers are more aware about MF products than they were around two years ago, and the learning process for them is still on.

EQM: You accept the fact that if sub-brokers are not able to sufficiently communicate the positive features of a product, then there could be a negative impact on sales, especially since sub-brokers are expected to double up as investment advisors?

Mr. Mishra: Yes, definitely. And its not just a question of sales, its also about managing investor expectations. Fund houses are going to find it very difficult to meet investor's expectations in future. So in order to meet the investor's expectations, the fund house is going to need a very well-informed sub-broker community which can communicate the advantages of investing in a particular product.

Basically, there are different kinds of sub-brokers. One group of sub-brokers is knowledgeable and is like a financial advisor. This group consists of chartered accountants, commerce graduates, etc.

The other group is the traditional sub-broker, which simply sells forms, he's something of a form peddler. Currently the form peddlers are being pushed out of the market by the other category. I personally have seen many sub-brokers who are very knowledgeable and understand the product very well.

The fund house must constantly upgrade the knowledge of the sub-broker community, as it is in their own interest. For instance, they must explain to the sub-brokers why gilt fund (net asset values) NAVs fluctuate despite investing in government securities which are relatively risk-free. The NAVs fluctuate because of the interest rate risk. So all this is a learning process for us, and when we learn these concepts, we must naturally educate the sub-broker community.

EQM: Latest market share figures of the mutual fund industry reveal that the Unit Trust of India (UTI) still commands close to 67% market share, with the others accounting for the balance 33%. How long will it take for the private funds to grab over 50% share of the market?

Mr. Mishra: I really can't say when the private funds will corner 50% of the mutual fund industry. But one thing that is very clear is that private funds have grown at a scorching pace over the past 12-18 months.

EQM: You admit that most of this growth has come at UTI's expense?

Mr. Mishra: No, not at UTI's expense. The mutual fund pie has actually grown bigger. If you look at household savings, bank deposits account for about 45% of total savings. Company fixed deposits account for about 4%. While UTI accounts for a paltry 0.50%. So if the mutual fund pie is getting bigger its certainly not coming from UTI (which is just 0.50% of savings), its coming from the balance 99.5% comprising bank deposits, company fixed deposits, etc. So when we say, private funds are growing at UTI's expense that's the wrong way of looking at it. Moreover, as you know, UTI's net assets under management have actually increased.

EQM: What is your view regarding the performance of private funds' schemes vis-ŕ-vis those of UTI?

Mr. Mishra: That depends on what you mean by performance. Are you referring to a NAV on NAV performance? Or are you referring to service standards, customer-centric attitude, returns, etc.? If you are looking at all these criteria in totality, then yes, private funds have enjoyed an edge over UTI.

However, you can't take everything away from UTI. They are a good organisation and some of their schemes have also shown very good growth. There may be some confusion in the minds of investors about some of their products, which are not NAV-based, but by and large it's a great organisation and I don't see any risk to UTI per se.

EQM: UTI has an enormous distribution network, comparable to that of a few private MFs put together. How do you and other funds see yourselves against such a large distribution network?

Mr. Mishra: UTI has had a headstart of over 35 years. That kind of headstart is difficult to overcome so soon. We are not even trying to reach that level of distribution network. We are very clear in one thing, we don't wish to enter an area, if we know we can't service it well.

Moreover, UTI had some other things going for it that gave it an edge over others. For e.g. it offered 4-6% brokerage to agents, and that is how it managed to build such a large network. However with the onset of market-driven developments, when private funds entered the fray and offered lower brokerages, investors realised very soon from where UTI's high brokerage was coming - from the initial issue expenses. So as more investors learn this, things will change for UTI.

As far as we are concerned, we do not have the infrastructure to grow that much, and in fact we are not even looking to have such a large distribution network. We are happy at the rate we are growing, and we are finding even the current distribution network hard to manage. Moreover, we don't even have what it takes to service such a large distribution network. For example when I declare dividends, redeem units, how do I pay money back to investors. I must have tie-ups with banks, there must be other systems in place. Funds have to be geared to do that. If you really look at it, most funds are just 2 years old and have not really had the time to put such systems in place.

EQM: With Internet banking taking shape in the country, do you feel that some of these problems will be solved?

Mr. Mishra: Not really. In future maybe, but currently these problems will remain. Only two banks are really into Internet banking - HDFC Bank and ICICI Bank. Both these banks don't really have an extensive network across the length and breadth of the country. The day these and such other banks expand their networks and payment gateways with nationalised banks like SBI are in place, then Internet banking will really take off in India.

EQM: Even in its current form the Internet can be used as a medium to disseminate literature, offer documents, application forms, etc. The bricks and mortars agents can't match the reach of the Internet. Does this mark the decline of the traditional bricks and mortar agent?

Mr. Mishra: You are right about the advantage of the Internet as a medium to distribute literature But the Internet has a long way to go before it can replace the brick and mortar agent. Internet subscription in the country is still very low, especially in the smaller towns and cities, where the people have low purchasing power which translates into less computers, fewer telephone lines, low Internet usage, etc.

EQM: A lot of funds have tie-ups with international funds. Is there a lot of technology involved which necessitates these tie-ups?

Mr. Mishra: If you are implying that mutual funds is just a financial product, I don't subscribe to that view. Mutual funds is a surrogate investment avenue in equities and debt and involves a range of services like marketing and distribution, managing expectations, customer centricity, etc. If its just a question of managing funds, you have portfolio managers doing that, but a mutual fund's functions are much broader. There are some aspects at which the foreign partner is good and there are other aspects at which the Indian partner is good. For instance, the service standards of the foreign partner is much higher than that of the Indian partner. But I am not saying that an Indian mutual fund cannot perform all these functions on its own.

As far as ICICI MF was concerned, we had a couple of products to begin with and our first foreign tie-up with JP Morgan did not work out as we had divergent philosophies. But our partnership with Prudential worked. So a partnership works whether it is between two Indian partners or between a foreign partner and an Indian partner.

EQM: What is your view about opening up of pension funds?

Mr. Mishra: That's a very big market. The government has little choice apart from opening up the sector. It will happen, but I can't comment on the time frame.

EQM: Are MF products still being sold as equity IPOs as they were in 1993-94?

Mr. Mishra: In 1998-99, sub-brokers still had fears of the Morgan Stanley era fresh in their minds and were not selling MF products as equity IPOs. But lately some sub-brokers have started doing it. Fortunately for us, the big players - banks and financial institutions are not selling it as equity IPOs. Of course, the odd sub-broker is still selling it, but by and large this trend has been stifled. But the revival of this trend is a constant worry for us.

EQM: Where do you see Prudential-ICICI MF 2-3 years from now?

Mr. Mishra: I would not like to hazard a guess on that count. But what I can say is that our basic philosophy will not change. Prudential-ICICI is an investor-centric mutual fund. For instance, we are registered transfer agents (RTA). Which means that despite having such a large investor base of 250,000, we continue to deal with investors directly, and not through Computer Age Management Services Ltd. (CAMS). In other words, the investor's interface in case of redemptions, purchases is through us and not through the registrar. This comes at a huge cost to us. At least 30-40% of our staff is customer-service staff.

We don't claim to be the fund offering the highest returns. We don't claim to be the No. 1 fund in the country. We claim to give consistent returns with the best service that we can offer.

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