Scholarly article on topic 'Indian mutual fund industry: Opportunities and challenges'

Indian mutual fund industry: Opportunities and challenges Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — Jayant R. Kale, Venkatesh Panchapagesan

Abstract This article presents an overview of the mutual fund industry in India and the reasons for its poor penetration, which includes lack of objective research. It benchmarks the industry globally, and raises key issues regarding the ownership and performance of mutual funds, the sensitivity of fund flows to performance, and the importance of regulation to its growth, all of which have been largely under researched in India. It then captures the views of leading practitioners on these and other issues, including the challenges posed by poor financial literacy, the equity culture in the country, and the weakly supportive regulatory environment.

Academic research paper on topic "Indian mutual fund industry: Opportunities and challenges"

IIMB Management Review (2012) 24, 245-258

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ROUND TABLE

Indian mutual fund industry: Opportunities and challenges

Jayant R. Kalea,b, Venkatesh Panchapagesan a'*

a Finance and Control, Indian Institute of Management Bangalore, Bannerghatta Road, Bangalore, India b J. Mack Robinson College of Business, Georgia State University, USA

KEYWORDS

Mutual funds; Indian mutual fund industry;

Active management

Abstract This article presents an overview of the mutual fund industry in India and the reasons for its poor penetration, which includes lack of objective research. It benchmarks the industry globally, and raises key issues regarding the ownership and performance of mutual funds, the sensitivity of fund flows to performance, and the importance of regulation to its growth, all of which have been largely under researched in India. It then captures the views of leading practitioners on these and other issues, including the challenges posed by poor financial literacy, the equity culture in the country, and the weakly supportive regulatory environment.

© 2012 Indian Institute of Management Bangalore. All rights reserved.

Academic perspective

Mutual funds (MFs) have existed for more than a century and have played an active role in financial markets all around the world. The first modern mutual fund came up in

* Corresponding author. Tel.: +91 80 2699 3349. E-mail addresses: jayant.kale@iimb.ernet.in (J.R. Kale), venky. panchapagesan@iimb.ernet.in, iimb.review@gmail.com (V. Panchapagesan).

Peer-review under responsibility of Indian Institute of Management Bangalore

the US in 1924 and there were more than 700 funds that existed in the US just before the Great Depression.1 In India, however, the first mutual fund company was the government sponsored Unit Trust of India, which was established in 1963 and was the only mutual fund available to investors until public sector banks became eligible to offer mutual funds in the 1980s. But it wasn't until the mid 1990s when the private sector was also allowed to compete that the industry saw a real growth in assets.

Despite this growth, mutual funds remain a small player in Indian financial markets. Mutual funds account for only around 3% of the overall equity market capitalisation in India while they represent more than 30% of the market capitalisation in the US. The Indian mutual fund industry manages

1 2012 Investment Company Fact Book.

0970-3896 © 2012 Indian Institute of Management Bangalore. All rights reserved. http://dx.doi.org/10.1016/j.iimb.2012.05.004

roughly $87.5 billion of assets, which constitute only about 0.4% of the global assets under management.2 Given the dearth of longer-term investment options in emerging markets such as India where household savings are usually high, one would expect mutual funds to become popular once made available. Moreover, one would expect poorly literate Indian investors to participate in the economy's growth by outsourcing the complex process of investing to mutual funds rather than trying to do it themselves.

Yet, for various reasons, mutual funds have not been the investment of choice for Indian households. Government estimates suggest that investments in security related investments, including mutual funds, have hovered around 4—5% of household savings for more than a decade despite significant governmental concessions.3 Physical assets such as real estate and gold along with the "safer" bank deposits continue to be sought after by Indian investors. Aside of structural reasons, lack of objective and scientific research on mutual funds has also hurt the promotion of the culture of investing through intermediaries among Indians. This article is an attempt to examine the state of the Indian mutual fund industry through a round table discussion with leading industry leaders and view some of its challenges and opportunities from an academic point of view.

There is a significant amount of global academic research on mutual funds, and these studies have, by and large, concentrated on the MF industry in the US primarily because of data availability.4 Even in the US, the first serious academic study on mutual funds came more than forty years after the establishment of the first modern mutual fund.5 There has been no serious work on the performance of the Indian mutual fund industry for lack of data though there have been some studies that examine short-term impact of regulatory rule changes.6

The basic need for most research is data on mutual fund returns, specifically historical daily fund returns. Though recent offerings from some data vendors include daily returns on mutual funds, they are only available for existing funds and not for funds that have closed or merged with another fund in the past. The bias induced by survivorship bias makes it difficult to interpret the returns and to perform meaningful research on the Indian mutual fund industry.

Broadly, global mutual fund research is focused on one or more of the following themes: (i) the performance of mutual funds, individually and as a group, including the persistence in performance across time (ii) the ability of the manager to time market trends and to pick stocks that increase in value, (iii) the relation or sensitivity of fund flows to fund

2 Ibid.

3 Report of the Working Group on Savings during the various Five-year plans.

4 For US MFs, researchers have access to data for a number of years on returns, quarterly portfolio holdings, voting record, and governance.

5 The first seminal work on US mutual fund industry was by Jensen in 1968 where he showed that MF managers, on average, don't outperform the market net of fees and expenses.

6 See, for example, Anagol and Kim (2012).

performance, (iv) the fund managers' incentives for risk-taking, (v) the explicit and implicit fund fees and costs, (vi) the trading performance of funds, (vii) fund governance structures, and finally, (vii) regulation. Describing the state of research in all aspects of MFs is beyond the scope of our paper; hence we will focus on a few of these areas.

Mutual fund performance and fund manager ability

The two most important questions with respect to MF performance and manager ability are: Do MFs earn a better return than what investors can earn on their own? And, do fund managers have superior ability to make better investments than other investors? Since funds charge investors fees in various forms for their services, it is their net-of-fees return that needs to be compared to a suitable benchmark. The literature is divided on the issue of whether MFs provide superior investment performance. In his seminal paper, Jensen (1968) finds that for the sample period 1945—1964, MFs earned an excess net of fees (gross) return overthe market of —1.1% (-0.4%), and that over 66% (58%) of the MFs in the sample earned negative abnormal net (gross) returns. Thus, Jensen concludes that MFs do not do better than random chance irrespective of whether we consider their gross or net returns. Several later researchers (e.g., Ippolito (1989), Brown and Goetzmann (1995), Malkiel (1995), Gruber (1996), and Carhart (1997)) confirm Jensen's conclusion that MF managers do not possess any superior investment skill. Moreover, researchers like Carhart (1997) show that there is persistence only in under performance as poorly managed funds remain under performers on a consistent basis.

Other researchers are more sympathetic to the performance of MFs. In a theoretical paper, Berk and Green (2004) demonstrate that MFs may not earn superior returns even if fund managers possess superiorability. The intuition for their result is that managerial ability is in limited supply and that there are diminishing returns to ability. In a competitive environment, investors supply more funds to better-performing managers, which drives their abnormal performance to zero. Inferior MF performance can also be attributed to the fact that MFs are forced to trade for liquidity reasons following abnormal fund outflows/inflows. Their total abnormal return thus may be zero as it is the average of informed and liquidity-induced trades. Edelen (1999) provides evidence consistent with liquidity-induced trading by MFs. Chen, Hong, Huang, and Kubik (2004) find that future returns relate negatively with current fund size and argue that this negative relation is due to liquidity costs.

The papers described above evaluate MF performance on the basis of their abnormal returns relative to some benchmark return-generating process (see Carhart (1997) and Ferson and Schadt (1996)). Another set of papers focus not on return performance but analyse fund portfolio holdings to detect superior ability. Daniel, Grinblatt, Titman, and Wermers (1997) present two such holdings-based performance measures, the return attributable to a manager's "stock-picking" ability and a return that relates to the manager's "market-timing" ability. Daniel et al. (1997) and other papers (e.g., Grinblatt and Titman

(1989, 1993), Wermers (1999, 2000), and Chen, Jegadeesh, and Wermers (2000)) that use holdings-based performance measures find evidence suggesting that fund managers possess superior ability.

More recently, researchers have proposed more novel methods for identifying whether a fund manager exhibits superiorability. Kacperszyk, Sialm, and Zheng (2005) compute an investment concentration index for a fund's portfolio holdings that is akin to the Herfindahl Index based on the deviations of the fund's holding in 10 industry groups from the market portfolio weights. They propose that greater investment concentration imposes costs on the manager from not being diversified and, hence, only the "better" managers will concentrate investment and find empirical evidence consistent with their conjecture. In a related vein, Huang and Kale (2012) present a theoretical model which demonstrates that "better" managers will take into account not simply the information specific to a firm but will also generate information on firms that are economically linked to the firm through supply-chain relationships. These authors present evidence which shows that the level of a fund's investment in the linked industries is a better predictor of the fund's performance (return- and holdings-based) than the fund's investment concentration in general or in one industry.

There are other papers proposing new measures of fund managers' superiorability. Among them, Cohen, Coval, and Pastor (2005) index manager quality to the manager's investment consistency with "star" managers, Kacperczyk and Seru (2007) propose a measure for determining how much a manager depends on private information, Kacperczyk, Sialm, and Zheng (2008) compute a measure for the manager's unobserved "activeness," Da, Gao, and Jagannathan (2011) consider the fund's investment in stocks with higher probability of informed trading, and Baker, Litov, Wachter, and Wurgler (2010) analyse the abnormal returns around subsequent earnings announcements of stock purchased (sold) by MFs to detect the manager's ability to "forecast economic fundamentals".

There has been no rigorous academic study on the performance of mutual funds in India though a few studies such as Ferreira, Keswani, Miguel, and Ramos (2011) examine performance across many countries including India. Using a four-factor model, they present evidence for India that is similar to that suggested by Carhart (1997): there is persistence in performance only for poorly performing mutual funds. Interestingly they point out that, unlike in the US, funds that are located outside the US do not face decreasing returns to scale. In the absence of academic studies, industry agencies such as S&P/CRISIL come out with their evaluation of the industry. A recent S&P/CRISIL report suggests that the majority of actively managed mutual funds in India under-performed their benchmarks over the five years between 2007 and 2011. Also, given the limited investable universe for Indian fund managers, it is possible that herding is much more significant in India than in the US.

Fund manager incentives, fund flows, and fund performance

A ruling by the Department of Labour in the US, in the 1970s mandated that those who had fiduciary responsibilities

emanating from managing others' money could not be paid bonus contracts. The reason provided was that bonus contracts that reward good performance but do not punish poor performance imply a convex (option-like) payoff function for a fund manager. This convexity provides the incentive for managers to undertake unduly risky investments. Researchers subsequently noted that several institutional factors and empirical regularities acted together in such a way to make the manager's payoff function convex. Specifically, the facts are that most managers are paid a percentage of the assets under management, and better fund performance attracts disproportionately greater fund inflows than the outflows associated with poor performance.

In the empirical research on this subject, Brown, Van Harlow, and Starks (1996) provide evidence that is consistent with this implied convexity and show that funds with poor performance increase the riskiness of their portfolio. Ferreira, Keswani, Miguel, and Ramos (2012) estimate the level of convexity in flow-performance relationship for 28 countries including India and find that India is one of the nine countries in addition to the US with significant level of convexity. Lynch and Musto (2003) and Berk and Green (2004) analyse the determinants of the flow—performance relation and provide a theoretical rationale for the observed convexity in the fund flow—performance relation. With respect to the risk-taking behaviour implied by this asymmetric fund flow—performance relation, Berk and Green (2004) present a theoretical model that predicts a monotonic decreasing relation between fund performance and subsequent risk-taking by managers. While the empirical papers show that poorly performing funds increase risk, they also find evidence that the relation between risk-taking and prior performance may not be monotonic. In fact, these studies find evidence of risk-increasing also by the funds with the best performance.

Evidence of risk-increasing by better performing funds is not consistent with the theoretical prediction in Berk and Green (2004). A recent paper by Hu, Kale, Pagani, and Subramanian (2011) presents a theoretical model that includes career concerns of the manager, which is the likelihood that the manager may be fired following poor performance. The evidence in Chevalier and Ellison (1999a) indicates that fund managers do indeed face significant risk of losing the job. Hu et al. (2011) show that when the manager's payoff is convex and with absent career risk, all managers, over- and under-performing, will increase risk. However, including career risk in the mix leads to a nonmonotonic, roughly U-shaped, relation between risk-taking and prior performance — risk-taking is initially decreasing and ultimately increasing in prior performance. The intuition is that the manager with poor performance has high likelihood of being fired and, therefore, the payoff convexity leads him to take more risk. The manager of the top-performing fund, on the other hand, is so far away from being fired that he increases risk simply to avail of the benefits of the convex payoff. Hu et al. (2011) provide empirical evidence that the relation between prior performance and risk-taking is U-shaped. Another recent paper, Huang, Sialm, and Zheng (2011) also provides evidence that is consistent with such a non-monotonic relation between prior fund performance and managerial risk taking. Important issues such as career concerns and

risk taking may be constrained in the Indian context given that risk taking is limited through regulatory guidelines (for e.g., Indian mutual funds invest less than 1% of assets under management (AUM) in futures and options as evidenced by latest data from the Securities and Exchange Board of India (SEBI).) and fund managers may not have a vibrant hedge fund market to bid for their skills.

Other research on mutual funds

As mentioned earlier, the research literature on mutual funds is vast and covers a number of aspects — the earlier sections described in some detail only a few of them. In this section we will provide a very brief summary of research in other areas of mutual fund research.

Several recent papers examine the effects of management structure, namely, management by teams and side-by-side management, and show that this factor is an important determinant of MF performance. An earlier paper in this genre is Chevalier and Ellison (1999b), which shows the effect of the level of education of the MF manager and fund performance. Golec (1996) relates manager tenure to performance and Khorana, Servaes, and Wedge (2007) show that managerial ownership affects performance. Some of the recent papers in this strand of literature include Nohel, Wang, and Zgeng (2010), Baer, Kempf, and Ruenzi (2011), Cici, Gibson, and Moussawi (2010), and Deuskar, Pollet, Wang, and Zheng (2012).

There are several papers that relate fund characteristics to performance. Wermers (2000) shows that a fund's turnover ratio has positive effect, and its expense ratio a negative effect, on fund performance. Chen et al. (2004) and Pastor and Stambaugh (2010) show that greater fund inflows erode fund performance. Research, including Khorana et al. (2007), Chen, Goldstein, and Jiang (2008), Deli (2002), Elton, Gruber, and Blake (2003), and Massa and Patgiri (2009) shows that fund governance mechanisms and the presence of the advisory contract also affect fund performance. Even in a legally well developed country like the US, controversies abound on the real independence of directors in mutual funds (see Tate (2000)). In India, mutual fund companies need to have at least 50% of their directors to be independent. Whether they really remain independent and whether having a more active regulator like SEBI can mitigate some of the weaknesses in traditional fund governance mechanisms remains an empirical question.

The fund industry is characterised by the presence of fund families and there are several papers that study the role and effects of the fund family structure. Massa (2003) finds a negative relation between performance and the degree of product differentiation in the MF families, whereas Chen et al. (2004) show that fund performance, controlling for its own size, does not deteriorate with size of the fund family it belongs to. Gaspar, Massa, and Matos (2006) find evidence that MF families may cross subsidise the performance of a favoured fund while Chen and Chen (2009) and Cici et al. (2010) find that MF families that have both MFs and hedge funds, favour hedge funds over the mutual funds. Cross-subsidisation is possible in India as there are a limited number of fund families floating a large number of equity and debt funds. Recently, many debt-related mutual funds came

under the SEBI radar in India following allegations that fund families were moving losses from one fund to another to the detriment of investors' interests.

Finally, there is research which shows the effect of institutional investment on the dynamics of asset prices. Institutional managers, given their fiduciary responsibilities, are expected to behave according to the "prudent man rule" in law. Badrinath, Gay, and Kale (1989) and Del Gurcio (1996) show that prudence leads to a preference by institutional investors for bigger, low-risk, and low-leverage firms. This preference affects the dynamics of asset prices. Badrinath, Kale, and Noe (1995) present theory and empirical evidence that the presence of prudence results in the returns on portfolios with high institutional interest leading the returns on the portfolio of low institutional interest stocks. Subsequent papers including Sias (1997), Boehmer, and Kelly (2009) and Cohen and Frazzini (2008) present evidence on how ownership by institutional investors affects other aspects of financial markets such as liquidity and return predictability.

Unlike in the developed markets, emerging markets also face a limited investable universe for mutual funds, which could act as a sort of capacity constraint. Anecdotal evidence suggests that though there are more than 5000 companies listed on the BSE, most fund managers seek to invest in not more than 300—400 companies. The instability of the Indian IPO market also has not provided a steady flow of new companies that are deemed investable for these funds. The small size of the investable universe, coupled with growing AUM could exacerbate some of the price dynamics suggested by the above research.

Indian mutual fund industry: opportunities and challenges: discussion

Anchor

Venkatesh Panchapagesan Panellists

Sandesh Kirkire, CEO, Kotak Mahindra Asset Management Company; Sandesh.Kirkire@kotak. com

Sankaran Naren, CIO, Equities, ICICI Prudential Mutual Funds; Sankaran_Naren@icicipruamc.com K. N. Vaidyanathan, Chief Risk Officer, Mahindra Group and former Executive Director, SEBI; VAIDYANATHAN.KN@mahindra.com Faculty and students from IIMB and other institutions were part of the audience and they took part in the discussion.

Venkatesh Panchapagesan

Mutual funds are an area where not much academic work has been done in India, but a lot of academic work has been done globally. So this is an excellent opportunity for us to talk to important practitioners in India who have been in this field for a long time and who have seen the evolution of this industry from the 1990s to the present. We have two

speakers joining us in person and there is one more speaker who will join us over video conferencing.

Sankaran Naren is the CIO of Equities from ICICI Prudential Mutual Fund. He has about 20 years experience in the financial services industry and he joined ICICI in 2004. He has a B.Tech from IIT Madras and an MBA from IIM Calcutta.

Sandesh Kirkire is the CEO of Kotak Mahindra Asset Management Company. He joined the group in 1994 and has been CEO since 2005. He is a mechanical engineer and he holds a master's degree in management studies from Jam-nalal Bajaj Institute of Management Studies, Mumbai University. While Naren brings the equity experience, San-desh has been on the fixed income side. So you have two speakers who are managing money but at the same time, they have different takes on the markets and this industry.

The third speaker K. N. Vaidyanathan — Vaidy — is currently the Chief Risk Officer of the Mahindra Group but before that he was part of the Securities and Exchange Board of India (SEBI) as Executive Director in charge of the institutional investors' portfolio that included mutual funds. He is also an MBA from IIM Ahmedabad.

Naren, would you like to begin by giving your view on the industry and what do you think is going to happen?

Sankaran Naren

I have seen and been an integral part of the mutual fund industry since 2004. When I joined, the industry was at a very nascent stage with total assets under management (AUM) in the equity space pegged at about $450 million. The industry has witnessed significant growth only from 2004. I learnt from Venky that in an aggregate market cap of about $1.1 trillion, if you have $30 billion, then there is potential to outperform the benchmark. Once that $30 billion dollars becomes as big as $150 billion, outperforming the benchmark will become increasingly difficult.

Our industry is small and nascent and why the industry is small is still a big question, because the taxation and regulatory framework that we have in India is far better than in most other countries. Today you don't have entry loads, and the taxation on mutual funds is very benign. If you hold equity mutual funds for more than one year, there is no tax on the capital gains in any equity scheme. There is also no tax on dividends paid beyond the distribution tax. So from a regulatory point of view, the regulations help the mutual fund industry.

The other point that Venky made is that in the rest of the world, hedge funds have become very big because they provided attractive opportunities for talented fund managers. Mutual funds have lost the best people to the hedge funds. However, there is no taxation benefit in India for hedge funds. It is not easy for the hedge funds to deliver post tax returns similar to mutual funds. But despite that, I believe that the reason why mutual funds have not become big is because of the tendency of Indians to trade in equity rather than invest with a long term view.

The second, which is specifically true in the last five years, is that two other asset classes, gold and real estate, have managed to give much better returns with much lower volatility. Mutual fund investments are therefore being pulled back due to two key factors at this point of time, (a)

the fact that people make money in alternate asset classes like real estate and gold and (b) people are inclined to trade in equities on their own in India. This is evident from the fact that we have one of the best futures markets in India compared to most other places in the world. From my experience of more than twenty years in equities, less than 1% of people have made money in derivatives markets. But despite that, the derivatives market is the lynchpin of the Indian equity market. In the next twenty years, inflows into mutual funds have to improve, but for that to happen the two alternate asset classes, real estate and gold, will have to begin to give lower risk adjusted return than equities. Unlike equities, in both assets, particularly in real estate, profit and loss in not tracked daily. That adds to the glitter of the real estate market because even if you have made a wrong decision, every morning, you don't get a mark- to-market which will tell you that you have lost/gained money.

Going forward, I am of the opinion that investment in equity mutual funds is going to increase significantly over the next 10—20 years. Will it happen in the next one year? No! This will only happen when the real estate cycle runs its course and bottoms out. You cannot have a situation where real estate is more expensive than in the US, while equities are not. There are many companies where the real estate value of their factories is much more than the market caps, let alone the business which is generating profits. In view of the higher upside potential, the next twenty year view on mutual funds is extremely attractive.

Mutual funds have been through two phases — i) the 2004—2007 phase and ii) the 2010—12 phase. The 2010—12 is a fantastic phase because you do not have new fund offers (NFOs) as the principal vehicle of collecting money. It is all about performance delivery. If you have not delivered returns in your funds, invertors will not invest. There are about 250 schemes which exist in the equity market, and less than twenty get inflows. The twenty that get inflows have demonstrated consistency and good long term performance. So, there is no disruptive competition, as in 2006—07, where an NFO collected all the money.

On the whole I would say that the industry is on an extremely good regulatory and long term growth footing; however, at the same time, in the near term the industry is still facing a conundrum.

On the investment side, the period 2004—07 was a "risk-on" everywhere in the world, including in India. In the current phase, we can look at the West and learn what went wrong there. For example, I was running a value fund in 2004. One set of the funds were invested in financials and it got crushed in the 2008 financial meltdown. The other set of value funds was invested in low price to book stocks. This set of funds faced very strict sector limitations on how much you could invest in low price to book stocks, and became the star funds of 2008. We learnt from this and decided that our value funds cannot have disproportionate allocation to any sector. We are observing mistakes made round the world and this is helping us to go back to the drawing board and fine tune our investment process.

I have been the fund manager at ICICI Prudential Mutual Fund for the last eight years. In India, 2007 was a very interesting year for us. There were funds which outperformed the benchmark by 20%. I ran a few funds which underperformed the benchmark by 20% in the year 2007.

And I was very distressed as a fund manager by the end of the year. However, my company and investors gave me time, and what happened in 2007 got corrected between 2008 and 2012. It means that as a fund manager, I need to take the right decisions for my investors in my scheme from a long term view, instead of for the next few months. For example, people say that the telecom sector is not doing well and the problems may not get resolved shortly. Most people would not invest in the telecom sector. But the fact is that electricity, food and telecom are now basic human needs and hence these sectors will improve over time. But that cushion is available to only a few experienced mutual fund managers in India. Unlike the new entrants in mutual funds, people who have been in the industry for long can take decisions based on long term benefits. The distributors and the investors give us that benefit and that allows us to take the right investment decisions which usually tends to play out over the long term.

Our companies are not built for the bubble or for the burst; they are built for the period in between.

On the whole, the current regulatory environment is very investor friendly. However, the industry is still to see significant growth. Better awareness and investor education can turn the tide. But the good thing is that there are talented people in this industry. That puts us in a good position and we will continue to learn out of the global experience.

Venkatesh Panchapagesan

I would like to raise a couple of points that Naren touched upon and present the same problem from an academic perspective. There is something unique about an emerging economy like India, where information sharing varies across different sectors. Klapper, Sulla, and Vittas (2004) have found that markets which have very low regulatory framework are poor in governance, poor in information sharing and they are the places where growth is stunted. This lines up with Naren's observation about people being inclined to trade in equities on their own in India. It also lines up with the fact that investors here prefer to work with no transparency. This makes it very hard for the mutual fund managers to seek money.

Naren mentioned the long term view that mutual fund managers have to take. Given that these managers face daily redemption unlike hedge fund managers, it will be hard for them to ignore short term pressures which could lead to a big drop in their net asset values (NAVs). This is an important issue that differentiates larger funds from smaller funds. The smaller funds can get wiped out even from a small jolt in the market while the larger funds have some confidence which helps them to carry on with their strategy. It is interesting in the Indian context to see whether a bad performance by a mutual fund manager would have a stigma attached to it, and whether it would be a career concern.

Moreover, studies such as Brown et al. (1996) have shown that mutual fund managers who are performing badly would adopt riskier strategies than fund managers of a fund which is doing very well.

Now we turn to Sandesh for his views on the current state of the industry and its opportunities and challenges.

Sandesh Kirkire

The current regulatory framework of the Indian mutual fund industry has been in effect since 1996 whereas the first mutual fund, US 64 (which does not exist anymore), came into existence in 1964. US 64 never had a net asset value, but was the largest fund! The regulation finally happened in 1996 and if I remember correctly, US 64 folded in the early part of 2000.

The Indian capital market has been in existence for over a century now. The total Demat accounts (for both National Security Depository Ltd — NSDL, and Central Depository Service Ltd — CDSL) for a country of population of over 120 crores is about 2 crores. When you look at duplication there, the assessment is that there are fewer than 75 lakh investors in the country of 120 crores. Today mutual funds would have total equity folios of close to 4 crores, so you have duplication there as well. The estimate is that there are between 75 lakh to 1 crore investors who have invested in Indian equity markets through the mutual fund.

The real issue in India is that we do not have forced savings in the equity markets as it exists globally. Financial literacy continues to be low. Indian investors have had too many years of administered interest rate regime. The total assets managed by the mutual fund industry has been 9—12% of total commercial banking deposits over the last 10—15 years. The issues about financial literacy have been addressed globally by bringing more investments into the capital markets through their long term core/forced savings.

In the equity secondary market in India, in the retail segment, for every 100 rupees that trades in that segment, 90 rupees is in derivatives, 10 rupees is in cash and I think less than five rupees is in delivery. So, equity as an asset class which is supposed to be long term, seems to be viewed in a very short term manner. The longest investment for a resident of India is in his provident fund (PF). But that "longest investment" does not participate in the equity markets. The finance ministry has laid down a regulatory framework which determines, the investment pattern a PF should have. Today it allows up to 15% of gold to equity markets, but the Employees Provident Fund (EPF) which is a defined benefit system does not invest in equities.

The retailisation of the capital market has always happened through long term savings. Unfortunately, in India, long term savings are not coming into the markets where they should. That is the framework with which the mutual fund industry is grappling to build assets today. So you have a scenario whereby the retail investor believes that equity is for the short term. At the same time, when you look at the regulation and the framework, the mutual fund industry stands out, as Naren said, as one of the best in the world in terms of cost for the customers. Unfortunately, the only financial product that the customer buys is a bank deposit. For every other financial product, he needs an advisor. This is so even for something like Exchange Traded Funds, perhaps the lowest cost funds, which a person can buy in the secondary market without any advisor. Even Barclay's Global, with some of the largest ETFs in the world, is not retailised but sold by institutional investors based on the pricing they have directly with the customers.

When you look at equity performance of the industry over the last decade or so across all products, there's reasonably large alpha that is being produced. Obviously, as Naren was saying, as the size grows, the alpha creation will become difficult. Investors expect mutual funds to produce positive returns even if the underlying market is negative.

The question now is why we should be in this market when the index has not moved in the past five years. I think you have to go through a learning phase. In 2008, the asset allocation would have skewed in favour of equities due to the sharp rise in the markets. However the rebalancing of asset allocation did not happen. Markets always give lumpy returns and therefore a pure asset allocation exercise helps the investors. The Indian equity market is significantly owned by foreign investors, about 30% approximately, and global financial market activity does impact us tremendously. The Indian market has a long way to go and there is no doubt in my mind that an economy like India will continue to have foreign flows. With aspirations going up and everybody trying to produce positive returns, investors would like to look at asset allocation as a favoured way to create alpha over inflation. But one must look at the fact that ultimately the mutual funds are pass through. They will generate performance in line with what is underlying and one needs to understand the kind of alpha that they are going to get.

I have been in this industry since 1999, a few years since the regulation came. I have seen a lot of changes. Improvement in the basic financial literacy continues to be the challenge. I was happy to see that CBSE Boards today are looking at basic financial literacy courses in the 11th and 12th standard. I think that will make people understand better and equip them to research and invest when they finally look at mutual funds. Mutual fund brings out some degree of diversification, and some degree of alpha on the broad market but the asset allocation principles is what one would look at for creating that wealth.

almost close to forty years after the fund industry itself started.

How does India stand in the global scenario? The Indian mutual fund is very tiny in the world's stage (Fig. 1 — World Mutual Fund Industry). Even within our cohorts in the BRICS community our assets under management are only $87 billion as compared to Brazil which is a thousand billion. Brazil's growth also took place around the mid-90s. While the US dominates the field the growth in the assets is coming from emerging countries. When you consider mutual fund asset as a proportion of GDP, which is a common metric to see how big the intermediate asset management is, again India is very tiny (Fig. 2 — Mutual Fund Assets as Proportion of GDP). You can think of it as a possible growth opportunity, or on the other hand, you can say that we have unique structural problems that are impeding growth.

If you consider the growth of our mutual fund assets from the 1990s till the present they seem to mimic the SENSEX growth (broader market) (Fig. 3 — Indian MF Growth and SENSEX Growth). Most of the growth is in debt category, especially the liquid/money market fund category. In the US, there have been some recent innovations in the mutual fund industry, called Target Date Funds, where people who plan to retire in 20 years' time allow the mutual fund manager to make the decision of how to allocate their money so that as they get closer and closer to retirement, the amount of debt or the fixed income component in the portfolio goes up. What one would want is to have lower risk as one gets closer to the target. If you benchmark the growth of the Indian mutual fund industry against another developing economy, Brazil, you will find that there too, growth has taken a long time (Fig. 4 — Brazil Debt and Equity Fund Growth). So, when people say that the mutual fund industry is not growing, we have to be patient because a lot of institutional details need to be ironed out, which is very difficult. For example if the universe of stocks does not grow, increasing the mutual fund asset base is going to be

Venkatesh Panchapagesan

I have formulated certain themes that cover a gamut of issues, from performance down to governance, in the mutual fund industry. For each of the themes there are a few exhibits that highlight the academic work done abroad on those themes. The questions that people are trying to tackle in the academic community and the kind of results that they have found may be different in the Indian context.

Let me begin by giving you a little bit of the context of the mutual fund industry. The mutual fund industry is a couple of centuries old, so it is not something that cropped up recently. However, the first set of serious academic studies which looked at the industry seriously was in the 1960s. We are in a similar state in India where we have a mutual fund industry which really took off in the mid 90s but we don't have any academic study on the industry. The reason I am emphasising "academic" is that academic studies are generally objective and are open to debate. We need to have a third party to look at the performance of the industry and at alpha generation. Even in the US which is considered high on financial literacy, the first study came

Germany 1

Canada 3.2%

AUM by countries, 2011 (Global AUM=$23.8 trillion) India 0.4%

Others

United Kingdom 3.4%

Luxembourg 9.6%

Ireland 4.5%

France 5.8%

Australia 6.1%

Figure 1 World mutual fund industry (Source: Data from ICI fact book 2012).

Figure 2 Mutual fund assets as a proportion of GDP (Source: ICI fact book 2012 for MF AUM data; world bank for GDP data).

problematic because then all the money will go towards the few liquid stocks that are available.

In the US, you will see that households do own a lot of mutual funds (Fig. 5 — Institutional and Household Ownership of US MFs). Moreover, about half of the mutual fund assets in the US come from retirement bonds. There is a legal and a tax reason why it makes sense to put money into a mutual fund for retirement and the mutual fund industry in India is actively seeking similar concessions. The pension fund industry is also in a very nascent stage in India and it needs to be developed. If you look at the source of the bonds the investors first purchased in the US, the first one typically comes from an employer-sponsored retirement bond (Table 1 — Employer-sponsored Retirement Plans). The comparatively large investment in mutual funds

through retirement bonds in the US was enabled by a change in the law in the mid 1970s. Most investors go through that route.

There has been a lot of academic work on fund performance, on fund flows and size. The question being asked is, what are the determinants of fund flows. You would expect performance to be a natural determinant but it is not necessarily true in lot of countries. Coming to size, there has to be a natural limit to how much you can grow and how big you can become Cost and performance are linked. But I am de-linking the cost for this discussion to highlight the fact that there are fixed costs and variable costs. The variable costs are the ones that are important for an investor. Then there is the issue of fund governance. The relevant questions here are: How is the fund set up? Does

Indian MF AUM Growth, 1998-2011

700000

(Л 600000

£ 0 500000

с 400000

2 300000

< 200000

100000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SENSEX Growth, 1998-2011

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 3 Indian MF growth and SENSEX growth (Source: Association of Mutual Funds in India (AMFI) and Bombay Stock Exchange (BSE)).

600 500

Brazil Debt Fund Growth (1995-2004)

s 300 3

■- 25 ¡20 « 15 10 5 0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Brazil Equity Growth Fund (1995-2004)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 4 Brazil debt and equity growth fund (Source: Varga and Wyngert (2010)).

the ownership of the mutual fund matter? How do the funds themselves contribute to the governance of the companies that they have invested in? Fund externalities are also a very interesting issue. Even though the investment management community views it mostly as an alpha producing factory, they are a lot of externalities that you and I face in having active mutual funds in the economy. For example, they improve asset pricing, they improve market efficiency. If you believe they are sophisticated investors, they produce information which gets into prices and that does good for all of us. Similarly they are very good in giving liquidity in the market place because they are large investors/large traders. There are several questions that arise on all these themes.

Next, let me share with you the academic state-of-the-art on mutual fund performance. Unlike in India where mutual fund managers are "rock stars" and are making lots of alphas, in most countries mutual fund managers on an average, underperform the market. This has been borne out in studies at large. There is a very interesting academic paper (Cremers, Ferriera, Matos, and Starks, 2011) which looks at mutual funds across the globe and the highlight

here is that only 36% of mutual funds outperform the simple four-factor model (such as momentum factor, value factor etc) as the benchmark (See Cremers et al., 2011, p. 38, Table 6, Funds with positive abnormal performance by country). So what it really says is that if you use a very naive strategy where you are just taking money and putting it into a simple model, you should be doing as well as the mutual fund manager 60% of the time. This is across all countries, some of them developed, some of them not developed. It would be interesting to hear the thoughts of the speakers as to what the state in India is and what the source of that alpha is here.

My first question to the speakers here is: There is a general perception that Indian mutual funds make alpha. What is the source of this alpha? The source must

Table 1 Employer-sponsored retirement plans.

Figure 5 Institutional and household ownership of US MFs (Source: ICI).

Source: ICI

either be private information that mutual fund managers are able to have vis-a-vis the general public or it could be that they take public information and process it better. If it is the latter, then you can argue for things like quantitative management. Could you begin by telling us how alpha is defined in India?

Sankaran Naren: Alpha is defined with respect to the benchmark of the specific fund. If it is a mid cap fund, it would be a mid cap index. If it is a large cap fund, it would be either equity or BSE Top 100 or Sensex.

From my experience, till 2006 not enough companies were actually researched by the market players. There was inadequate company research so if you had done your research before the research analysts in the sell side actually started to cover the company, you made money. 2007 was the year where I underperformed the benchmark and it was a bubble year as far as I could see. I believe that post 2008 the alpha that was generating in India was primarily because there was an external problem either in Europe or the US where the Foreign Institutional Investor (FII) size of the market is roughly $200 billion. Ours is about $30 billion. The behaviour of the $200 billion market is based on what they see in their part of the world. Hence, when long-term refinancing operations (LTRO) begin, they start aggressively buying Indian equity. We in India don't focus so much on LTRO and we start selling. Then suddenly Greece and Spain have problems; they start selling and we start buying. In my opinion, the $200 billion of FII money in India post-financial crisis is behaving in a very volatile manner. They keep buying and selling based on what they see in their part of the world and therefore keep losing alpha to Indian investors in India. Secondly, I think it has become relatively easy to generate alpha in the last 4—5 years because the low quality companies have been under-performing. When the low quality companies start outperforming in the next few years, generating alpha will be that much more difficult and challenging.

Sandesh Kirkire: Fund managers work with earnings model estimates for their investee companies to generate the alpha on their underlying fund benchmarks.

Venkatesh Panchapagesan: We heard from both the speakers. Naren was talking more about how foreign flows give us a chance to produce alpha. Sandesh was saying that there is a fundamental stock selection. This leads us to the next question. Both these things can be done by somebody sitting abroad. Technically, if somebody has the information set that you had, whether it is fund flow information or stock level information, as long as it's public, it should be relatively doable by somebody sitting in Singapore or the US and making the same decisions to buy or sell. But there is some evidence that the domestic managers managing mutual funds on Indian equities are actually doing better than foreign funds. There are foreign fund managers who are also investing in Indian equities and they are doing worse. So is there private information advantage at play or is it public information that you can process better? The evidence doesn't seem to support the fact that there is simple

fundamental analysis that is responsible for the performance.

Sankaran Naren: From 2007 to 12, it has been very easy because we knew globally which were the companies with higher quality and which were the companies with lower quality, based on our local insight. So, we just avoided the companies with lower quality and generated alpha during that period. Secondly, I think behavioural finance theory has ensured that the investor sitting in a European city managing India money is not able to conquer his behavioural biases based on the problems around him. Locally we could understand which companies were not doing things well and that gave us an insight over the offshore managers. But to answer Venky's question, I think alpha came through both these factors/ sources.

Sandesh Kirkire: I think being on the ground, seeing what is actually happening, meeting companies and their suppliers/vendors, the domestic fund managers do have better access and have their ear to the ground. The deep fundamental analysis does help the fund managers in alpha generation.

Audience: Naren, you were talking about the growth of the industry. What kind of growth, in numerical terms, are you expecting for the next 20 years?

Sankaran Naren: If we use 10% of the market cap as a rough estimate, the size of mutual fund assets should be around Rs 110 billion. Now we are Rs 30 billion. Obviously, that number will go up or down depending on the extent to which mutual fund can penetrate in India.

Audience: What are the regulatory framework projections that you are expecting in the next two decades? With the availability of pension funds we will have more of money coming out of PFs, maybe to mutual funds. Then taxation might be different in a couple of decades. So what kind of regulations are you expecting?

Sankaran Naren: The longest investment that the Indian citizen makes is the provident fund which does not invest in domestic equities. With effect from 1st January 2004 the central government and subsequently most of the new state government employees have moved from defined benefit to defined contribution. The act is yet to get passed but I think that's the way ahead. Even the data would suggest that over 50% of equity market access for global investors, especially in the developed economies, has happened through the pensions to retirement savings. Going forward, this will be a big jump for institutionalisation of the domestic capital markets.

Sandesh Kirkire: The Direct Tax Code (DTC) is moving away from exempt-exempt-exempt (EEE) to exempt-exempt-tax (EET). The EET framework globally has seen large flows of capital from retail investors into the capital markets through 401(K) kind of retirement schemes. We have seen the entire defined benefit (DB) -defined contribution (DC) discussion in the global

markets and how companies and nations have failed because of the DB issues. The government did catch up with that at the right time way back in 2008 to move away from the DB path. That is where I believe the institutionalisation of capital markets will be.

Venkatesh Panchapagesan: I want to bring in Vaidy into our conversation. What do you think the regulation ought to be in the mutual fund sector and how do you visualise it going forward?

K. N. Vaidyanathan: In India positive government policy to the mutual fund industry is very limited. It is more in the realm of tax arbitrage which is why you see a lot of institutional corporate players and banks coming into the mutual funds and not so much retail, long term money. You don't have the equivalent of 401K that you have in the United States. To me the big determinant is government policy. Only then can the mutual fund industry move away from the push or sell approach where they collect customers one by one into a pull approach where mass consumers sign up. If the mutual fund industry has to have a good shot at making things happen a lot of regulatory arbitrage has to move. There is a big trade off that the mutual fund industry is faced with. A large part of the industry today benefits from the tax arbitrage and a large part of the industry's growth is hampered by regulatory arbitrage.

Venkatesh Panchapagesan: Can you explain what you mean by the regulatory arbitrage?

K. N. Vaidyanathan: One of the hangovers of the regulatory environment in our country in financial services is that we tend to think of the Reserve Bank of India (RBI) as the benchmark. When RBI put out its regulatory framework, it separated banking and non-banking activities. So in the 1980s when banks set up the housing finance companies or capital markets or merchant banking or mutual fund they said, that's nonbanking, you keep them separate. This suited RBI because vertical splitting was by function. Subsequently we have developed regulators around products, not functions; so we have the regulator for mutual funds, a regulator for insurance, a regulator for pension and so on. What you don't have is a regulator by function. So Sandesh and Naren are governed by the SEBI regulatory environment for mutual funds. His counterparts who manage insurance money are governed by Insurance Regulatory and Development Authority (IRDA) regulations and a third person is governed by Pension Fund Regulatory and Development Authority (PFRDA) regulations and so on. That has, in effect, hurt the asset management industry. We have confused the product and the service provider of the product and the function. Each of the products is stunted. Asset management is a business of skill and scale. Now we have asset management business that has been fragmented across different products. Worse, identical products are subject to very different regulation depending on whether the regulator is at a phase where he thinks he

has to support development or at a phase where he thinks he has to bring in tighter control.

I'll take specifically the point on something that I tried to do when I was at SEBI and a lot of it is yet to be done. In trying to solve the issues regarding the asset manager, we have actually created more issues — The asset manager of a mutual fund till about a year ago was told that he had to stay focused on the mutual funds he managed. If he managed any other money under something called 24— 2, he had to show Chinese walls to say that there were completely different people, different processes and different incentive structures.

In the insurance industry, it was declared that in the first round you can appoint mutual funds asset management companies (AMCs) as managers. Then they went retrograde to say that the asset management had to be done within the insurance company. So the opportunity to bring scale across mutual funds and the insurance industry was lost when IRDA said that's got to be separate. Next, we created the PFRDA which was not too clear whose particular interest it served. It came out with a bunch of regulations for which there appear to be no consumers.

So, you have regulatory arbitrage which is created around scaling and asset management business. Then you have regulatory arbitrage around product. So if Naren and Sandesh run an equity mutual fund, over the last 3—4 years, SEBI has significantly tightened a lot of the regulations in terms of how much they can pay out, in terms of derisking norms. The other regulators have not quite caught up. So, since 2010, we find that there were two identical products, one subject to extremely tight regulation that Sandesh and Naren had to work under and the other subject to fairly relaxed regulation because the regulator believed that he had a "developmental" role to support. So the regulatory arbitrage to me, is not so much about SEBI tightening mutual fund regulation as much as government policy towards the asset management industry, towards long term savings generation and government attitude towards coming down on all of these regulatory arbitrages so that you can get people to play on a level playing field.

Venkatesh Panchapagesan: When you said that in India the key thing is regulation by products as opposed to regulating the functions, how is it in the other countries?

K. N. Vaidyanathan: China, in a number of ways on the asset management industry, does a fairly good copy paste of the Indian framework. The best reference point for the asset management industry is the United States. The US has the asset management company which goes through a completely independent set of regulations from the underlying product. In the US insurance is a product that has State regulators; nobody has taken that away but nothing stops the insurance company from appointing an asset manager who comes under the investment companies' act to manage a portion of the money or all of it. Similarly, you could have sponsors of mutual funds appoint a completely different manager. The point I am making is you need product regulation if government policy is to push certain products (and the government has a role to push certain products,

especially insurance and long term savings) but alongside, you need a well thought through regulatory environment in terms of service providers to these products.

Venkatesh Panchapagesan: The debate on regulatory arbitrage even happens in the US. During the recent financial crisis a lot of hedge funds were selling products to pension funds and insurance companies — that was not regulated because they slipped through the cracks of different regulations. The point I am trying to make is that even in the US, regulatory arbitrage does exist and it is a function of the fact that you have multiple legacy regulatory jurisdictions as markets are getting more and more integrated.

K. N. Vaidyanathan: I think they are two different things. In the United States it is not so much regulatory arbitrage as much as a case of "the regulator slept at his desk". In India it is more about arbitrage. The fundamental difference is in the attitude towards investor protection and the difference in regulating functions in the United States and India. The US is extremely advanced in its regulation of the asset management companies and in the regulation of products but it is not so advanced if somebody cleverly pushes what is perceived as an unregulated product into a quasi regulator and that's where the damage happened in the US. We need to make this distinction very clear. The regulatory arbitrage that we have here in India is that product distribution guidelines are different, asset diversification guidelines are different, investor protection rules are different across identical products but between different regulators.

Venkatesh Panchapagesan: This is a good primer on the regulations — how the mutual fund regulations could have a huge impact on the kind of money that's coming, whether it is smart money, dumb money and so on.

I want to come back to the conversation we had prior to the regulation discussion which is on the development of the market, especially the point that the market itself, the investment universe, is not capable of handling huge inflows. From the position of the mutual fund manager, the asset prices can be highly distorted if more money is chasing too few stocks. Despite that, managers will still look good because they are comparing themselves against the benchmark. But from the social angle it is questionable whether these prices are justifiable or not. If suddenly the inflows double, what would you like to see, where would the money go? Are there firms that you would like to invest in if you had flows which are not in the top 200 or 300?

Sankaran Naren: I would say that 2007 was the only year in my entire career where flows were higher than what we could manage. Otherwise, all throughout flows have been very low. The disinvestment rule of the government of India has got into trouble because barring LIC no one had enough money to put a big sum of money in a disinvestment. So there are absolutely no problems of deployment at this point of time. We do not have a problem with managing size. We created scale in the industry in 2007 which can handle much larger amounts of money than is

being done now; I can handle three times the amount of money that we do today with the existing team. So I think we are far away from that problem and are actively looking forward to increased flows into mutual funds.

Sandesh Kirkire: Even if we reach there, ultimately at that point of time, hopefully there will be a reasonable amount of globalisation and domestic investment managers will start looking at opportunities outside India. Today we have funds which invest abroad but I think we are far away from that possibility at this juncture, based on our assessment of the market.

K. N. Vaidyanathan: Two things structurally are challenges for India. One, equity mutual fund cannot run ahead of equity investing. The equity investing in this country is about one and a half percent of the population, much less than 10% of the households which is 1 in 4 in the UK and 1 in 3 in the United States. So the equity culture is extremely under developed, despite the attention paid to it in the media. There is a lot of noise, but very little sound. The second structural issue is that we have size but no strength. We claim to have up to 6000 listed companies but if you ask Naren what his universe is, it would not go beyond item number 300. We confuse size with strength. And product differentiation becomes very difficult unless you take incremental risks and go beyond number 250 or 300. The liquidity drops precipitously after that. So, my worry on the second point is, it may be fine today, it may be fine when S30 billion becomes $60 billion but if you cross $60 billion, you don't have enough opportunity to create diversification. I see a problem not so much as a demand side constraint but as a supply side constraint, in equity investing in India.

Sankaran Naren: Given the environment where growth has not decelerated for eight successive quarters, I think we will eventually move from a $30 billion to $60 billion industry. Hopefully it should happen at a time when the economy is also in a growth phase as it was in the 2004—2007 phase when we had the ability to manage 500 to 600 billion dollars. If you are going to have asset growth without economic growth, it's a problem but it is unlikely to happen. So that's why I think this issue is not as big as it appears to be. While I don't deny what Vaidy is saying, I believe that economic growth, corporate growth, the smaller companies becoming bigger etc will all be aligned and will happen at the same time.

Audience: In the last four years, the economy has grown really well. What has been the supply of good quality new stocks by way of IPO's or FPO's? If you go by popular discourse in the financial media, it looks like a large majority of IPOs that have hit the market in the last 3—4 years are not investment worthy stocks. So, does economic growth always translate into high quality investment opportunities?

Sankaran Naren: In China, high quality growth and high quality companies have evolved together. In India, 2004—2007 was marked by growth in infrastructure; 2008—2012 was marked by growth in consumption. Equity

is demanded in the infrastructure industry whereas the consumption industry is underleveraged, so it doesn't require equity. The challenge is to move to a model where infrastructure projects attract highest quality companies. If not the highest quality, infrastructure should attract higher growth companies like it was in 2004—2007.

Audience: Taking off from Naren's point about real estate as the real asset, gold is a commodity; why are you not getting into real commodity investment which will give you a better diversification, which will give you a return on your investment?

Sandesh Kirkire: We made a beginning with gold. The issue is that there was a regulatory framework; the inter-regulatory arbitrage which Vaidy just mentioned exists even for commodities. You have separate regulations for financial markets and for commodities markets.

K. N. Vaidyanathan: Our approach to creating regulators is like creating power houses. Each regulator fiercely protects his turf. For example, with great difficulty, we managed to get gold ETF off the ground but when NSE wanted to start gold futures, we had a potential earthquake kind of scenario. The mindset of protecting one's turf has to change. The second point is, as students you need to think a little deeper. There is a big danger in promoting some of these products. You need to think through whether this is an asset class for which we need to create a vehicle that will go to the retail audience. On commodities I have my doubts but those are my personal concerns. Students need to research and say how much of this is value creation, how much of this is zero sum game and if it is a zero sum game, is it something you want to promote in a big way. This is a philosophical debate that I want to put down on the table.

K. N. Vaidyanathan: I want to leave you with a perspective which is different (based on the fact that I did spend two years in a government role). It is unreal to think there are rational tangible attributes like performance which dictate decisions. Let me put that in context. In the global scene if performance of a product mattered, aerated drinks would never exist, there would only be water. Management students need to delve little more into that and little less into the academic realm of performance, you will find far better insights into understanding the growth of the mutual fund industry and its prospects forward.

Venkatesh Panchapagesan: It has been a great conversation, though we haven't covered all the topics that I had intended for the panelists. Thank you all for joining in the discussion.

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