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The Rediff Business Interview/Vivek Reddy

'The market may go up and down, but the undercurrent is positive'

Kothari Pioneer Mutual Fund was the first to be off the block when India threw open the industry to the private sector in 1993. KPMF is a joint venture between Investment Trust of India of the H C Kothari group and the Pioneer Group Inc, one of America's oldest and most successful mutual funds, with a base of over one million investors in over 40 countries and over Rs 700 billion in assets.

Vivek Reddy, 36, KPFM's chief executive officer, calls himself "the first employee of India's first private limited mutual fund". The industry has been in the news ever since several incentives were announced for it in the Union Budget 1999-2000. Certain sections, though, have called for a review of the sops. Even as the fate of the Budget hangs in balance due to political uncertainty, Reddy discussed with Shobha Warrier the mutual fund industry in India, its past, present and future. Excerpts from the interview.

The government has given tax sops on dividend earnings. How much will these help?

It will help. What is important is the sentiment. The Budget has said that mutual fund is a credible industry and that people can trust it. I think the confidence that the finance minister has given is a lot more helpful than the sops.

In the Rs 700 billion mutual fund industry, the Unit Trust of India holds Rs 550 billion. The private sector's contribution is only Rs 80 billion. Why hasn't the private sector been able to enter the field in a big way?

The UTI started in 1964 and until 1988, it was the only mutual fund in the country. From 1988-1991, public sector mutual funds like those of SBI, LIC, GIC were allowed to operate. So, until 1993, there were no private sector mutual funds in India. Kothari Pioneer Mutual Fund was the first private sector venture to be launched in India.

The UTI has been in the field for 30 years. Nevertheless, 5-10 years from now, things will be different.

In the last one year, the private sector mutual funds grew by 40-50 per cent while the mutual fund industry registered only 10-15 per cent growth. What explains the surge in last year?

A correction. The UTI is growing at the rate of 15-20 per cent and the other public sector mutual funds, at the rate of 5-10 per cent. However, the private sector mutual fund is growing at the rate of 50-60 per cent.

Although we started very recently, our growth is much faster. Investors have confidence in the private sector now because of our performance.

Investors make investments for better returns. In that context, the private sector has been able to perform much better than the public sector. Investors expect good service, and even here, the private sector is much better. We give them their money back quickly, within 24 hours or 48 hours, and easily. The investors do not have to run from pillar to post for their money.

We are also very transparent and investor-friendly. We let our investors know exactly what is happening inside the fund while the public sector funds keep it within themselves.

Do the investors frequently ask you about what is happening to their money, or do you inform them on a regular basis?

We publish monthly performance reports with all the details about the investments. Therefore, they know what is happening to their money. We tell them everything that they need to know. We answer 99 per cent of their letters within 24 hours. For all these reasons, investors have faith in us. As I said earlier, we give better returns too.

The market is down, and all of you, the UTI, the public sector MFs and the private sector operate in the same market. So how is the private sector able to pay higher returns?

We have more freedom to operate. I give my fund managers all the freedom and autonomy to operate. We have more accountability and we give better rewards for good performance. If my fund managers do well, they get rewards. I think, we are more investor-friendly. We work in a more professional way by hiring the best people. Naturally, we have to pay them what the market pays.

I feel employees in the private sector are slightly more committed. In the public sector, employees are transferred and many a time, they are shifted from a bank to the mutual fund. Pay in the public sector is also not as much as the private sector. For all these reasons, the private sector has done better.

But the market is going through a recession, which makes the private sector's 50-60 per cent growth rate remarkable.

Growth is due to two reasons. Although the capital market has not been active, mutual funds have also grown because of income funds. Income funds are like direct deposits. We do not invest them in shares at all.

We only invest in debentures and we give steady returns at 12-13 per cent. It has many tax advantages in comparison to bank deposits. Even when the stock markets go up and down, we don't invest in shares. The income funds have grown a lot in the last one year.

Then, when do you invest in shares?

We do invest in shares. In the equity fund side also, we have done well because the private sector was the first to identify some of the better industries like software, pharmaceuticals, FMCG (fast moving consumer goods), etc.

We reached there early and changed our portfolios and invested in the companies which were growing well. Although the overall economy is in recession, these sectors have done quite well. Because we took an early decision and invested in them, we are doing well now.

You mean, the private sector saw the potential in software and pharmaceutical sectors much before the public sector?

Yes. For example, we have been investing in these areas for the last three years. However, the public sector has been following us for the last one year. They are a little bit late, you can say.

From where did you get the signals?

One, these companies are managed very well. They are very investor-friendly, open and transparent. All that we want to be to our investors, we saw in them. They are more like us. Two, they had good growth. They are growing well because they have a big export market. Some even had 100 per cent growth. Three, even in America, we found that software stocks and technology stocks were doing well.

So we thought if they did well there, it was logical that here too, they were likely to do well. So, we decided to go with these New Age industries. The order of the world is that there occurs a transfer of wealth as the world moves ahead.

The big manufacturers and the big industries were the sign of wealth, may be ten years ago. Now what is called the 'knowledge capital' has taken over the 'big money capital'. They are more investor-friendly now. We saw that trend three years ago and started to capitalise on that.

Have you been able to give consistent returns even when the market is inconsistent?

The market is inconsistent if you look at it from a short-term point of view. Everyday it goes up and down.

But the recession has been there for some time.

It has been there. But I think there are signals that show that we will come out of the recession soon. Therefore, when you talk about good returns, the market is inconsistent. But it is only when you look at it from a short-term point of view.

If you are investing for a long period, the market is not inconsistent. It is true that the market is going up and down, but the undercurrent is positive.

If you invest Rs 100,000 today, after six months, it may be worth only Rs 90,000. But after 3-5 years, this (Rs) 90,000 will grow and you are always sure of getting 20-25 per cent steady returns a year. So, the Rs 100,000 you have invested will become Rs 200,000 after 2-3 years. But inconsistency is the trademark of the stock market. However, in the end, it does well.

The mutual funds of big organisations like State Bank of India are finding it difficult to give proper returns to the investors while the private sector could. Is it because the public sector is not judging the market well?

I think the most important thing is the speed at which you work. The public sector has committees and individual decision-making is not there. In the stock market, you do not have the luxury of discussing it for many days and then deciding. It is the fund manager who does the research and he is the person who knows what is happening in the market and not the committee members.

When the committee knows less than the fund manager, why should the fund manager seek their opinion?

We have no committees in decision-making. The fund manager takes the decision and he makes it on the spot. The speed is one reason why we are successful now.

Photograph: Sanjay Ghosh

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