2nd February 2012

WF : 2011 was a difficult year for the MF industry and its distribution fraternity. What is your business outlook for 2012? What are likely to be the key business drivers this year?

Saurabh : From a business standpoint 2012 will continue to look challenging for the MF industry and the Capital markets business as a whole. We are seeing outflows at the retail folio level and SIP cancellations too are increasing which is a very worrying sign. In fact it is precisely this market volatility why SIP is recommended to investors from an investment perspective and if we see 4% cancellations per month at an industry level, it is a worrying sign. Investing is more about discipline than timing.

One of the key business drivers going forward is bound to be the Distributor Regulations being suggested by SEBI. Once implemented, there will be decisive changes in the business models of the distributor and in turn the AMCs. My wish would be that all the market intermediaries are clear and settled by the end of 2012 on their business models and we move back to focus on business again. There has been too much anxiety / wastage of time anticipating changes in the last 2 years.

On the business side, 2012 will also be the year where retail investors will embrace debt mutual funds due to an increased focus by AMCs to get retail investors in this category and interest rates starting to decline in the 2nd half of the year. This could potentially offset the loss of retail equity investors.

WF : You are spearheading AMFI's efforts on operational process simplifications and standardisation. What have been the major initiatives launched in 2011? What can distributors and investors expect in 2012 in terms of streamlined and unified processes? When can we see common application forms? What are the main challenges in standardising operational processes?

Saurabh : With a slew of regulatory and business environment changes, the AMFI committee of Operations and Compliance has been busy the last 18 months. 13 fund houses are currently represented on the Committee. Our objective is to streamline and standardize the processes for the industry as well as make appropriate representations for clarification where there is an interpretation issue on regulations or best practices. Ensuring adherence to Best practices by the industry and continuously updating the Code of Conduct too is a critical function of the Committee.

The Committee's approach has been to agree and set a minimum standard on requirements of an operational process and ensuring standardization across the industry. Of course what needs to be kept in mind is that based on the individual AMCs past experience, they may always choose to carry out additional processes, over and above the minimum standard requirement, which may not be appreciated by the customer or distributor. But there is a definite reasoning / past experience on which the concerned AMC is carrying out the additional check / process. Explaining this at times to the affected parties proves to be the biggest challenge.

The Committee however does try to take into account the feedback and continuously keep re-looking at the existing processes for suitable changes.

WF : What is your equity market prognosis for 2012? What are likely to be the key market drivers?

Saurabh : Equity markets have certainly started with a bang in the year 2012, with most indices up by 8-10%. Even the currency has appreciated by 5% since the Dec 2011 low. Having said that the 3rd quarter results have been in-line with expectations of top-line growth of 20% y-o-y but profit growth of only 7-8%. This trend in quarterly results is likely to continue for the next 3-4 quarters and therefore from a fundamental perspective, this market rally will be capped. Due to our own internal country issues of corruption and policy inaction by the government, the strong macro good feeling has disappeared and the markets corrected last year. We strongly believe that the current environment yet remains challenging, but due to the sharp correction last year, significant bottoms-up stock picking opportunities exist in the market.

Interest rates locally, policy action by our government (post the UP elections) and EU crisis will be the key fundamental market drivers for next year. Of course, in the absence of strong retail and institutional participation, small amounts of investments too are taking the markets up and down by 1-2% on any single day and this is purely a liquidity driven phenomena which cannot be predicted by anybody accurately. The EU has over USD 2 trillion of debt maturing in the next 6-9 months, and they are currently on a note-printing spree to fund these maturities which is in-turn is finding its way in the Asian equity markets as a whole.

I also hope that there is not a large increase in taxation rates (either direct or indirect) in this budget. Given the fiscal deficit situation, the government will need to look at various measures of raising revenues and raising taxation rates seems to be the only option left with them.

WF : Some experts believe that 2012 may well turn out to be the year of income funds. Do you share this view?

Saurabh : I agree. We have seen this in the year 2003-4. The Central Bank has the ammunition to reduce interest rates by 150 bps from current levels, which will help improve the GDP growth rate of the country. In the last 3-4 months, we have already seen retail investors starting to look at Debt Funds but more in the Short and Medium term funds. Now with the Central Bank making it clear that interest rates can only fall from here, retail investors will start looking at Income funds with a 2-3 year investment view.

WF : What are Religare MF's plans for 2012? What product and distribution initiatives can your distributors look forward to from you this year?

Saurabh : Religare MF has now completed 3 years, since its entry in the Indian Mutual Fund market in Dec 2008. Statistically, we have Rs. 11,800 crores of local AUM, Rs. 200 crores in PMS and Rs. 3,500 crores in offshore advisory AUM. We are present in over 50 cities and have over 250,000 retail investors in India and over 20,000 retail investors overseas now. From a 3 year result perspective, this should be fairly satisfying given the market turbulence and the timing when we started. More critically, our proprietary investment processes in both equity and debt have produced very good results over the last 3 years. For a fund manager, fund performance has to be the most critical aspect. We will keep focusing on sharpening our investment process further.

For 2012, we want to establish our presence in the retail debt segment, where significant traction is picking up and should remain for the next 2-3 years. Distributors too are finding it easier to convert clients in the debt funds as compared to equity currently. From a product perspective, we have the entire suite of debt, equity and gold products. We are now looking at international feeder funds, if the investment case is unique for the Indian investors.

WF : Revenue models for distributors has again come into question. On the one hand, we have the concept paper on advisor regulations that suggests eliminating all forms of commissions for advisors and on the other hand, recent press reports suggest a SEBI move to consider banning upfront commissions for all MF intermediaries. What in your view is a sustainable revenue model that distributors should build over the next 5 years?

Saurabh : 2011 was a year where some path-breaking regulatory changes have been proposed like transaction charges, distributor regulation and due-diligence to be carried out by AMCs.

Year 2012 should be a year, where these proposed regulatory changes will become law and see a change in the business model both for the distributor and therefore for the AMCs too. My wish is that after all these changes, let's hope the business model for both the AMC and the Distributor becomes clear going forward. A state of confusion, like it is now, always leads to a decline in business volumes.

WF : A couple of AMCs have in the recent past introduced process innovations to promote usage of liquid funds among a wider set of Indian savers. How significant a development is this, in your view, in terms of driving retail penetration for MFs? What in your view needs to be done to achieve meaningful retail penetration over the next 3 to 5 years? What are some of the steps you are considering in this regard?

Saurabh : I would not like to restrict it to only Liquid Funds. It is the Debt category as a whole. We are now seeing investors coming into FMPs, Liquid Funds, Credit Opportunities Fund and Income Funds. In the absence of interest in Equity Mutual Funds, retail participation in Debt Funds is a good, welcome and logical sign.

As compared to Bank Fixed Deposits and direct Bond Issues, debt mutual funds offer higher convenience (of access to the funds with a large penalty), as well as the ability to smartly allocate your funds in various strategies (to meet your cashflow requirements). Retail investors are finding it much more easier to invest their monies in the various debt funds based on their expected cashflow schedule and get far better tax-adjusted returns.

We have seen a very substantial increase in Religare Mutual Funds retail base through our debt funds in the last 12 months. We are educating distributors and retail investors on the positioning of our various debt funds and depending on their investment horizon, where the investor allocation should be.