The mutual fund industry is facing tough times with only a handful of fund houses witnessing sustained growth. Admitting that the going has been challenging, Harsha Viji, Managing Director of Sundaram Mutual Fund, says retail investors should stay invested for a longer term by adopting a systematic investment approach to reap good returns. Excerpts of an interview.

Why did you choose to join the mutual fund business?

I joined Sundaram Finance Group in 1998. At that time, I was working in the car portfolio. We had a joint venture with Fiat, and I was involved with that. Then I left to pursue my MBA. After completion of MBA, I joined McKinsey and Co in New York where I had a fantastic experience. I worked in many countries with different industries. At some point, I decided it was time to come back.

Since then, I worked at Royal Sundaram, and the core Sundaram Finance business.

The mutual fund business is one that has enormous potential. It is also a business which gives a high ROE (return on equity) because the capital required is not so much. For years in a row, in a very turbulent market, we have made money. It is also a business that is pretty close to our heart because it has a retail interest.

If you look at mutual funds in India, most of them have gone after large corporate and institutional investors. Out of the total industry size of about Rs.7.68 lakh crore, equity is only about Rs.1.60 lakh-crore. The other side of the business is small retail investors.

We have Rs.14,000 crore in assets with 18 lakh folios, which is highly retail. Also, we are looking at Rs.25,000-30,000 kind of retail investment. Many others are looking at HNIs (high-networth individuals). Our heart is in the retail segment. That has also held us good because retail investors are looking at it as life savings. So, it is not money that comes in one day and goes out the next based on what the Sensex does. They are long time savers, and long-term investors.

In Sundaram Finance, in the management and in me, there is a passion for this business. There is a feeling that this is a business that we have to grow dramatically. And, it was going through a very tough time with the stock market going sideways. So everyone was getting hurt. So, for me, it was partly passion and partly a great opportunity to try and shore up the business and get it back on a growth path.

Are SEBI regulations favouring the AMCs?

I wouldn’t say that. The AMCs (asset management companies) must survive. The investors and the distributors should make money. The Securities and Exchange Board of India (SEBI) is doing a very good job. It has to do a balancing act between asset managers, distributors and investors.

SEBI has taken away the exit load which used to go to the AMC as income. Exit load now goes to the investor. It is a highly positive step. It has also created an investor fund, which is a tax on asset managers — at around 2-3 basis points. This is to create investor awareness, and the fund is to be utilised only for that purpose. It is an investor-friendly move. The rural initiative actually gives the AMC some income — though it is 2 or 3 basis points in total. That allows the incentivisation of distributors outside the metros, and will greatly help the penetration of mutual funds outside the metros. On the other side, they have added service tax. They have given 20 basis points as additional expense ratio to spend. This is highly positive for AMCs. Investors are incredibly sophisticated. We believe that the industry will justify the extra cost. If we don’t, we will reduce the expense load ourselves because we know the fund won’t sell. It is a question of value.

In this bear market, large cap funds have under-performed. If the industry has to create value and attract investors, it has to give returns.

What are the reasons for this under-performance?

It is very fund and fund house-specific. Investors have been pulling money out, and it is harder for a fund manager to manage a fund when money is being pulled out. It has also been a very confusing market. It is a market unlike anything we have seen in a long time. It has been a sustained bear market for a long time but very confusingly bear with sideways movement. None of these are excuses because AMCs are supposed to deliver value whatever the market.

Why should an investor give money to an MF and lose?

It is very hard to answer this. In 2008, when the market crashed, a lot of retail investors lost their shirts. They were shaken by equity as an asset class. That was very unfortunate because that was just when equity culture was getting going. Those who hung on, the return on the Sensex three months ago was about 2.78 per cent. The point we are trying to drive home for retail investors is that systematic investment plan (SIP) is the best. I don’t think anyone can time the market perfectly. If you think that a fund manager in an AMC can time the market perfectly, he would have become a billionaire. For an investor, to take in SIP now and invest in the market, we believe, is a compelling story. Unfortunately, the opposite is happening. Retail investors are booking gains on rallies.

If you put in your money just in a deposit, you will be left with less purchasing power 10 years from now as inflation will erode your money. Your money will be safe but it will be worth less (not worthless!!). If you want to beat inflation, pretty much, the only asset class (other than gold and real estate) is equity.

The return on a mutual fund over a 10-year period not only in India but also globally has beaten inflation. There is a risk involved. The way to mitigate the risk is to systematically invest rather than try to time the market.

Is there confidence now among the retail investors to invest in a mutual fund?

This is a painful question for us. We passionately believe that this is the right time to start putting money in SIP because there are enough indicators that the market is going to be significantly better next year. But investors are behaving in the opposite way which is understandable. They have lost money all these years. There is value now with the NAV having come just above where they came in. So, across the industry, retail investors are pulling out money in hundreds of crores. This is sad because many of these retail investors invested at the peak in 2008. All the HNIs (high networth individuals) and private equity funds, who have a longer-term perspective, are putting in their money now. And, the retail investors are coming out. It is very sad.

What is the solution?

One of the problems is that mutual fund is still a push product than a pull product in this country. Things will change over time with investor exposure to mutual funds, investor education and more sophisticated long-term view on returns. The ultimate driver of the mutual fund industry is returns, which depend on the equity market. However, there is no cause for panic. We have to maintain our brand, maintain customer service and manage funds well and wait. That is what we are doing.

Are there short-term frustrations?

Yes, short-term frustrations can be there. But fortunately for us, the fund managers have been with us for long. They have sufficient grey hairs, and understand the business cycles. In a bear market, we have to try and hug the index. We have to see it through, and things will change for the positive.

When you took over, you had said that the industry was facing a testing time? Is it still so or has it improved?

I think the industry is still in a testing time. The stock market rally has to happen. We believe that by the end of March 2013, the consensus estimate for the Sensex by our team is about 20,000. We are more muted than several other numbers you may have heard. We believe that this is a realistic number for the Sensex.

Overall, the negativity has been overstated. The pessimism that is there … you look at most of the industrial sectors, overall companies are down by about 5-10 per cent … not more. This is not doom and gloom. The entire global economy is down. We are shrinking. It is a business cycle. It will get over in a year. There is just too much negativity built up, and, hopefully, that will clear.,, and