“Things are moving towards more money pouring into the index funds. That is why today we are launching the five passive funds altogether, three on the debt side and two on the equity side,” says DP Singh, ED, SBI Mutual Fund
Last time when we spoke,you gave us a tall number in terms of where the size ofAMC would be. You are on course to almost double it!
We set out a number and we are already 40% above that and from here on, if we do another 40%, we will be achieving the number which we committed to you.
Where is the growth coming from?
Growth is coming from all across. We never think that we are the market sharers. We are the market makers. We are creating a market. We are leading with great margin in the smaller towns – B30 – and in the top 30 also, we are increasing our market share. We are getting more and more new customers into the market, thanks to the parent having a foothold across the country. When we look at our data, we see that we are getting business from 94-95% of the pin codes of the country and that gives us a lot of solace.
So it is Bharat which is getting us money. Yes we are serving everybody, every niche in the investment arena is with us – ultra HNI or HNI or retail investor or small trader or a labourer. We are getting SIPs from Rs 500 to Rs 5,00,000. We are very happy and satisfied with the quality of numbers and the numbers per se.
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You are coming up with two new equity index funds, midcap and smallcap. Up until now, the index funds are largely benchmark dominated. For example, Nifty 50 or Bank Nifty. Why are you coming out with an index fund for mid and smallcap?
There are two reasons. One, on the active side, we have to pick up the stocks and we feel the universe is very limited for us. Then again, there is a capacity constraint, there is a liquidity constraint and so we thought that in addition to the smallcap active fund which we are having and we have the constraint of getting lump sum money, we thought of coming out with the Smallcap 250 Index.
One thing is very clear that the small caps index is outperforming and hopefully we continue to outperform the normal benchmark which you talk about Nifty 50 or banking, etc, because more and more new businesses are coming, very good management companies are coming and they are coming out with new ideas.
So the Small Cap Index will give us a leeway that we can get. Anybody who wants to take a call on the small cap per se, can get into this without any limitation of the amount. Secondly, liquidity will be easier here and there will always be some liquid stocks. In case of any redemption, there will not be any problem. So this is very good and very cost effective as well.
Just to understand the structure here, these are index funds. I am assuming the charge here would be significantly less than what you actually charge in active schemes.
Yes it will be significantly lesser but it will not be like the Nifty 50 or Sensex ETFs because here the cost of acquisition plus the tracking error will be much more because those are mirroring 100%. Here if we are having a little higher tracking error also. Since these are to be intermediated, we have to take care of all the stakeholders because in our business there are three stakeholders – the manufacturer, the distributor and the investor.
It has to be win-win for all the three because there is an acquisition cost involved, people have to advice, people have to intermediate, anyhow for the direct (7:56) the cost will be very-very significantly lower than the normal one.
So if one has to choose between midcap actively managed fund versus midcap index fund, what is a better idea because you have both the products?
Both have their own pros and cons. In the active fund, the whole research went within the midcap stocks. We do research on the stocks and we visit companies, we have a very close interaction with the management teams, we follow the businesses being done by the companies. There are lots of efforts which go into an active fund.
In the passive fund, on the other hand, we just have a universe and you have to put it there, period. So the efforts are less and so the cost is also less. But you get the benefit of the overall because we cannot say that whatever our universe will be, we continue to be the best performing. As of now, if we have got 300 to 400 stocks which are in our universe in the active side, we cannot really claim that these are the best.There could be some companies which may give very good results but if you are in an index fund, you will get the benefit of the growth in those as well.
So both have their own pros and cons. It has to be hybrid – active and passive both. If I have got Rs 100, I will definitely like to put Rs 20 to Rs 30 in the passives and remaining in actives as of now.
ET Now: Can I say that buy one Nifty ETF, one midcap and one small cap and a large part of diversification in equity market is taking care of? Is that the thought behind two new NFOs?
DP Singh: Generalising this statement is very difficult because of course we are of a very firm opinion that alpha generating stocks are still there in the market which are to be researched. Active will continue to grow at least for the next five to ten years. The kind of new businesses which are coming, need to be researched. We do not want people to be caught in something which is not being properly researched. So there is a space for both to continue.
Nifty, Sensex and midcap whatever passive portion in my allocation is there, if I got Rs 100, I will allocate Rs 30 to Rs 40 overall into the passives, remaining I will keep in the actives because I still firmly believe that active will continue to outperform the index funds.
ET Now: Globally a lot of chatter is on that index investing is the best and the cheapest way to create long-term wealth. But in India it is different. ETFs are not that popular, they are not that large and active funds have done a reasonable job if you look at a long cycle of meeting the benchmark. Do you think it needs to be understood that while index funds are important, active schemes also have a long way to go?
DP Singh: Yes because in the cycle, in the growth of the economy where we are as a moment, there are so many new businesses coming and we need to research those companies and see what is good, what is not good, what can give much better returns than index. That capability and possibility is very much there in the economic cycle where we are today and second is that our benchmarks are little skewed.
On one side, we have got only 50 stocks and on the other, we have only 30 stocks which are the main stocks. If you look at the US, the S&P 500, there are 500 stocks and that covers a lot of sectors. Today, the market is driven by FII and FPI flows and whenever somebody comes from outside, they first buy the main, the flagship index funds or flagship ETFs and get into these 50 or 30 stocks.
So a lot of money automatically comes into these stocks but whereasthere are more than 7,000 listed companies but the main benchmarks are only 50 companies or top 100 companies. So, a lot of research is needed in the remaining companies. Things are moving towards more money pouring into the index funds. That is why today we are launching the five passive funds altogether, three on the debt side and two on the equity side.
The thought process is that there will be space and more and more people will get into the index funds and that is why we are making it available to the citizens of the country.