Successfully holding on to pole position

The credit crisis has taken its toll on the Indian mutual funds industry. After more than half a decade of dramatic growth, the industry saw nearly a quarter of its assets wiped out in 2008. Assets under management (AuM) of the entire Indian mutual funds industry dropped from INR5,500bn ($112.06bn) at the end of 2007 to INR4,200bn ($85.7bn) at the end of 2008. A similar story was repeated at the country’s largest mutual fund player, Reliance Capital Asset Management which reported an 11 per cent reduction in AuM in 2008 after having experienced rapid growth in recent years. Notably, unlike a few other leading fund houses that saw either their market shares dip or a change in their overall market rankings, Reliance managed to not only hold on to its leadership position but also increase its market share by one per cent to 16.7 per cent. Bouncing back “The current financial climate is tough, but our economic fundamentals are robust and I expect to see the Indian mutual funds industry bounce back in the latter half of the coming year,” remarks Vikrant Gugnani, CEO, International Businesses at Reliance Capital and erstwhile CEO of Reliance Capital Asset Management. It was during his tenure as CEO between October 2005 and December 2008 that Reliance scaled new heights, reaching pole position in the Indian mutual funds industry. Reliance Mutual Fund and its asset management company, Reliance Capital Asset Management were launched way back in 1995 when the Indian mutual fund market was newly liberalized and had started allowing private sector players into the space. However, it was only in the early 2000s when the mutual fund came into its own, rapidly growing assets under management until in 2006 it emerged as the largest private sector mutual fund in the country, overtaking the then leader, Prudential ICICI in the process. In 2007, Reliance overtook UTI, India’s oldest mutual fund, to become the largest mutual fund in the country. “As a fund house, our focus has always been in on reaching out on a mass scale to retail investors, unlike most others that target corporates or high net worth clients,” remarks Mr Gugnani. The Reliance fund house has been able to significantly expand its retail presence over the past three years, he says. In September 2005, it had 750,000 retail accounts across 32 locations and an AuM of about $3bn, which has grown to $22bn today with over 7.3m accounts spread across more than 400 towns and cities. Innovation has been the hallmark of much of Reliance’s approach in recent years. Seeking to increase its base of small investors, the fund house introduced an INR100 ($2) per month Systematic Investment Plan (SIP) in 2007. The minimum investment allowed in a SIP at that time was INR500. A SIP enables customers to invest in a mutual fund by making small periodic investments in place of a large one-time investment. Last year Reliance went a step further by adding a SIP Insure feature to certain mutual fund schemes, adding on life insurance cover to individual investors. “SIP Insure provides free life insurance cover to investors at no extra cost. In the unfortunate event of the death of an investor during the tenure of the SIP, the insurance company will pay for the balance amount towards the remaining unpaid SIP,” says Mr Gugnani, stating that all these features have generated a tremendous response in the market. He claims that the mutual fund business has over 800,000 investors under SIPs and is signing around 60,000 people every month. Reliance has created a big basket of mutual funds for investors. Starting with two diversified equity funds, it has a vast array of equity funds ranging across capitalisations and sector specific schemes such as banking, pharma and media, as well as fixed income funds. The fund house does not yet have a fund of funds scheme but has recently forayed into the Exchange Traded Fund (ETF) category by launching a Gold ETF that, says Mr Gugnani, not only offers the investors much needed liquidity but also allows diversification into an alternative asset class. The group runs predominately long-only equity funds and a whole range of short-term and long-term debt products. There is also a long-only equity offshore fund called Reliance Emergent India Fund. The fund uses a master-feeder route to invest in India. Its feeder funds are set-up in the Cayman Islands and the master fund in Mauritius. Reliance Asset Management (Mauritius) Limited, which is a wholly owned subsidiary of Reliance Capital Asset Management Limited (India), is the investment manager of the master fund and the feeder, explains Mr Gugnani. One of the main reasons for the dramatic increase in Reliance’s AuM in recent years has been the exceptional success of some of its new fund offers. The Reliance Equity Fund, a diversified equity fund that was launched in March 2006 is a case in point. The fund managed to mop up over INR57bn ($1.16bn) from around 1m investors, said to be the highest inflows ever in a diversified equity fund. The second highest collection was by Reliance Natural Resource Fund in 2008, which garnered INR56.6bn from over 1.5m investors. This fund aims to invest in companies principally engaged in the discovery, development, production, or distribution of natural resources. Distribution networks Apart from innovation and product breadth, Mr Gugnani attributes Reliance’s success in the mutual funds space to the Reliance brand name – Reliance is one of the largest business groups in India – consistent fund performance and most importantly, its wide distribution network. The asset management company has 28,000 distributors comprising Independent Financial Advisors (IFAs), banks and national distributors spread across 450 towns and cities across the country. “Given India’s vast geographical spread, it is necessary to have a distribution network that can reach investors in remote places. Our customers come from around 1239 cities and towns across India and 95 per cent of the customers have investments of a ticket size less than INR 500,000,” he says. As such, IFAs that reach out to small towns and villages account for nearly 70 per cent of flows, while the remaining 30 percent comes through banks and national distributors that have a presence in the top 20-30 cities. “Reliance has tie ups with both local as well as multinational banks for selling our products. For distribution purposes we categorise banks as Indian private sector banks like HDFC Bank and ICICI Bank; multinational consumer banks which have a presence in India like Citibank, HSBC, Standard Chartered Bank; and multinational private banks like Credit Suisse, BNP Paribas, Merrill Lynch. A new channel has been the Indian public sector banks,” says Mr Gugnani. This classification, he explains, broadly also defines the investor target segment attracted by these banks. Indian private sector banks have a well spread out branch network and are therefore focused more on the number of investors. Most of the investors that come through these banks invest under $50,000. Multinational consumer banks have a limited set of branches and focus on the higher end of the market where the typical investor has up to a $1m investment corpus, while private banks have a typical investor profile of at least $1m and above. Distribution going online The Internet is playing an increasingly important role in the distribution of mutual fund products, states Mr Gugnani. The fund house uses the Internet to disseminate information about its mutual fund schemes as well as a platform to enable investors to invest and redeem online through the netbanking service of 16 partner banks. “The Internet acts as a convenient and easy tool of investments for investors who cannot access our investor service centre. We have also tied up with top distributors to accept transaction through distributors in a soft file instead of paper based model.” Not content with merely acquiring the top position in the Indian mutual fund league tables, Reliance Capital Asset Management is aggressively looking to increase its investor base manifold in the coming months. “Our philosophy is that if there can be over 100m mobile phone users in India then why can there not be 100m mutual fund investors?” The fund house is also not restricting its ambitions to the domestic market. It is looking outwards and in his new role, expanding Reliance’s mutual fund footprint outside India is one of the main objectives for Gugnani. In this regard, the Middle East, Asian markets such as Singapore, and the UK which have a high population of Non-resident Indians (NRIs) are some of the target regions. Over the past year, Reliance Capital Asset Management has acquired an advisory licence in the UK that enables it to offer advisory only services to both distributors and investors in the UK. It is also among the first few international players to have received a license to set up an Islamic fund management firm in Malaysia. In the Middle East and other Asian markets where the Reliance Capital Asset Management has representative offices in strategic locations such as in Dubai and Singapore, the plan is to create a third party distributor base through which the fund house can distribute both offshore and onshore schemes. Mr Gugnani elaborates: “The strategy here is to build a network of third party distributors such as banks, IFA platforms, multi-managers and fund of funds, for the distribution of both offshore and onshore schemes.” “Our aim is that in the next 5-10 years, Reliance Capital Asset Management should be ranked among the top 100 asset managers in the world,” he states ambitiously.

Vikrant Gugnani