The geopolitical conflict in the Middle East, high interest rates across many major markets, inflation...; there is a lot to worry about for capital market investors. However, in general, India remains a bright spot and global investors remain positive about investing in India, according to Kaustubh Belapurkar, director - manager research, at investment research firm Morningstar India. In an interaction with THE WEEK, he also shares his thoughts on the growing domestic mutual fund industry, entry of new players and choosing between active and passive funds, among other things.
What is the mood among investors right now in the backdrop of what has been happening globally?
I see in general a lot of positivity. What has been happening is, there is a lot of negative news coming from across the globe. The underpinnings and conversations that we are having and hearing is that India is really the spotlight, not just from a local investor's perspective, but even from a global investor's perspective. Generally, everyone is positive about investing in India. The one challenge as an investor today is there is so much news. How do you distill that news into actionables and stay the course, that is most important. If you stay invested, you can make a lot of money, rather than moving in and out of markets.
We did a study, that looked at the difference between a fund's return and what an average investor made in that fund. The gaps were pretty significant, like three per cent. Over time, these gaps have come down as investors become more disciplined in investing, instead of moving in and out of the markets, which can cause these gaps.
Foreign investors come and go depending on the global scenario and that has typically driven Indian equity markets. But in the last few years, we have seen a strong domestic investor interest emerge; mutual fund assets, SIPs have grown significantly. How do you see this change? Do you see this as sustainable?
Absolutely. There is a lot of work that has happened in the backdrop. We have among the most transparent disclosures; regulations have made this a very tight ship. Investor education campaigns too have garnered a lot of eyeballs. All of that is coming into play. Had the Covid market crash happened 10-15 years ago, you would have seen a lot of money move out of the markets. Instead, what we saw was not only did the SIPs continue, but lump sum investments came back. That is the change that has happened.
I think this is sustainable as the industry is growing; we are only scratching the surface right now. The more assets you build, the more visibility you get and more people will come in. We are on that cusp and will continue to see this growth over decades.
Passive investing via ETFs and index funds has picked up in a big way in the last two to three years. We have startups now who have entered the mutual funds business, offering only index funds. These passive funds worked very well in the US, but will the same work in a market like India, and should investors look at passive investing over active?
Passive and active can both co-exist. There is a lot of scope for active investing in India. But if I am an investor who does not have the expertise or the time, or I want to buy equity funds, but sit out of the market just because I can't make a decision on which active fund to buy, I am losing out on participation in the market. Here is a simple solution, I buy the market through a passive fund.
There is also the behaviour of investors. Growth style of investing did really well in 2018, 2019 and 2020. But, a lot of money that came into these growth-oriented funds was after the return had already been delivered. Then these funds underperformed. Value-oriented funds did poorly at that time. So money moved out from value funds into growth funds and now value funds are outperforming. Because of these behavioural biases or looking at past performance, which every human is susceptible to, passive funds are a great option.
Active investing is still going to be a large part of the market. If you look at how much Indian equity market cap Indian mutual fund managers own, it is roughly about 7-8 per cent. So, it is not a significant proportion of the market and you will still have a reasonable number of fund managers who can beat the market. Investors need to understand that even good managers will go through a period of underperformance. Just because the market cycle is not favourable, that does not mean they are doing a bad job. If they stay the course, they will do well. Investors just need to find those resilient, well-managed strategies and stay invested to make the returns.
There are over 40 fund houses in India. But, a lot of the money goes into the top six to seven fund houses. Now many new players are starting operations, several of them with a strong pedigree in managing foreign funds, portfolio management services etc. How do you see this market evolving?
The pie is also growing. The big guys have well-established teams and processes. So, their AUM (assets under management) is not going to shrink. They are going to grow, maybe at a slightly slower pace. Will the new guys struggle? I don't think so, especially the guys that come with a USP. There are new players coming who are strong investment-focused houses, there are several who have the legacy of serving either foreign institutions or PMSs. They already have the investment expertise, many of them also have a client base.
Then there are the technology-driven fintech platforms, whose USP is really about enablement of reach. A lot of them are exploring the passive mode because their strength lies in client base, the reach, technology and user interface to make transactions easy, but don't want to set up an investment shop and compete against investment experts. So, there is a room for everyone to grow. The industry will continue growing at a healthy pace.
With an established fund manager like Blackrock making a re-entry into India (with Jio Financial Services), should the others be worried, or you think it will be one of many players in the market?
I think it will be one of the many. We are very excited to see what they are bringing to the table now, and what their strategy is going to be. It will help grow the market. As bigger names come, it just elevates the whole space or the product for investors. It creates visibility. Not only will they grow their India business, but will also help others get interest from existing and new investors.
