Market Cafe: Are investors ready for 'high risk' MFs? Nimesh Shah of ICICI Prudential has this to say

Nimesh Shah: Yeah, that we won't have complaints. The industry is doing very well. The industry I think has done very well for the investor. And the way SEBI regulations have come across is that whoever does well for the investor, will get further money. Yeah, so 88% of what we what is a new sales for ICICI Prudential actually comes from existing customers only. Repeat customer is a theme repeat customer, the old customer is happy is giving you more money. So the industry is going on growing.

Surabhi Upadhyay: But tell me specifically this year, the last 12 months, so much has been thrown at the mutual fund industry. There was a change in taxation on the debt side. That was the big headline, then there was a talk about the way you know mutual fund industry makes profits, the tea or expense ratio issues there. Now there is talk of, you know, a whole new category called high risk funds in between there was this whole influencer drama that you you guys can't associate with influencers unless they're registered. A lot to take in this, you know,

Nimesh Shah: See, I've been watching this industry since 2007. I've been doing this job since 2007. And my take is that every year the regulator has made it more and more pure for the investor. Why is this industry doing well? This industry is doing well because of the good regulations in the industry. We are consistently delivered for the final customer, the final customer is happy. It gives me a lot of happiness today to say that 99% of the customers who have stayed with me for three years, who've completed three years with me have earned double digit returns, right? So that's what we look forward to, that gives us happiness. And if we are kept our customers happy, we will get and we'll keep on growing and anywhere in the world, it has been seen, we were 10% of the banking industry 10 years back. Today we are 24% of the banking industry. So many investors coming in 10 years, we've removed from 10% of the banking industry even wise to 24% of the banking industry. So any country in the world when the per capita crosses $2,000, the AMC industry will keep on growing. So I envisage by 2030, we could be 1/3 of the banking industry.

Surabhi Upadhyay: Wow, that's the growth

Nimesh Shah: That's the size of the industry.

Surabhi Upadhyay: And all credit to you, to investors because I've seen the change earlier. When we subtract stock markets the day there was a big FII sell number there used to be panic like oh my god, FIIs have sold so much Indians stock. This whole last year foreign investors have been selling and new folks have been buying, domestic institutions.

Nimesh Shah: So, this happened in 2021-22. And it was a great time, that every month FIIs would have for eight nine months they kept on selling $5 billion into the market, right, and mutual funds kept buying. Today mutual funds have got an SIP of 16,000 crores. Plus they are one time sales. So while FIIs will affect us because they are 17 and a half percent of the industry, even mutual funds are 8% of the market cap of the country. So mutual funds are that much of a counter force today to the FII selling.

Surabhi Upadhyay: Good stuff, you know. So viewers, yes, we are going to talk about how young people should invest. That's one of the main reasons we have Nimesh for this on the show. But you have to allow the journalist in me to get to the hot stuff. The masala as well, right? And this is a recent development. Just last week there was some chatter about regulator SEBI, maybe, you know, looking at the option of starting a new high risk category. Your thoughts on this? Nothing is clear. Is there a need to allow mutual funds to take more risk? Or is it just a wrong concept to begin with?

Nimesh Shah: See when there is a whole risk management or mutual fund is all about diversification all about risk management. So, when we look at our customer, we look at our retired schoolteacher in Guwahati. Right? If a retired schoolteacher in Guwahati is investing with me, and he remains with me over a business cycle, over five years, he should have a reasonable experience. That is our lookout, the way we run risk in a mutual fund. So, it's quite that mutual fund is a very good platform. And on that platform, we have created various funds, but the risk is very well managed and controlled, right? Risk management. I run a financial risk management company. That's what I say. Right? My main function is risk management and diversification. Maybe what, I don't know what is envisaged, but there can be various kinds of funds, as long as we transparently disclose, and we allow only a specific type of customers to come in. We are balancing so I don't know what is envisaged. But we should do any part of the business we do, whether we do mutual fund, we do alternates, we have to have the risk management right for the final customer.

Surabhi Upadhyay: You mentioned that you've been, you know in this business since 2007. Right? And you've been with ICICI Prudential

Nimesh Shah: I joined ICICI Prudential in 2007.

Surabhi Upadhyay: So, you tell me you have seen business cycles, you've seen market cycles. You've also seen investors evolve. What are the bigger changes that you've seen in the last 15 years in terms of investing behaviour of the janta (people) which is putting their money in mutual funds.

Nimesh Shah: So, very positive. To a certain extent, earlier, when I joined the industry, money used to go out in less than a year. There was a huge amount of churn in mutual funds. Today, the average persistency is more than three to four years, right. So, the persistency has increased quite well. So that is a one of, and then when outflows have, when markets correct, you normally get inflows, right? People don't get worried when the markets fall. In fact, people want to invest. That is why mutual funds will become a counter force to the FII selling. I remember 2011, 2012, 2013, 2014, whenever FIIs would come in markets would go up. So, alternate years market used to go up and down. So now that is not happening, that is a huge change. So good if we are able to convince the retail customer that this is a long term instrument, you make money over a business cycle, and more and more people are understanding that but the campaign is still on it's a long journey, still people look at past returns and come in though we keep on saying that past return is no indicator of future but this has to move.

Surabhi Upadhyay: That is a huge change! Your industry is also getting very competitive right. So many new players are coming in you have fund houses then big international fund houses are all set to you know make a splash make an entry here. What do you think?

Nimesh Shah: We're in a very great country called India where the market is infinite. We've got less than four crore customers with mutual funds. Already what Khelo India Khelo that is happening, everybody wants to get into stock markets. I call it Khelo India Khelo, because there are eight crore people who have got demat accounts. So, I see it is a very, very, very exciting opportunity, and I feel more players should come in, they will only grow the market. Right a lot of new digital players who have come in will only grow the market. So, I'm very excited with the new players coming in. We will I think the market will keep on growing in India we are in in finite market. So we should not worry about new people coming in. It is a great opportunity that new guys will come with new innovation, new thinking, so it's good for us also.

Surabhi Upadhyay: Okay. I'm going to ask you about the funds that you like and a bit I always do that whenever I meet Nimesh, I ask him where he would put his money and the funds that he likes. But wait for that to come up in a bit. Since we spoke about newer categories and higher risk right. I think one one trend that's very real is also that the mutual fund investor is not willing to take risk. The kind of inflows for instance and mid cap and small cap funds were drawing in I think just up till even the last month figures, right? What do you make of that, and is that a challenge when so much money is being thrown at small cap, mid cap funds, not so much on large caps?

Nimesh Shah: So, that is the problem that people still look at past returns since mid cap and small caps' three-year return is fantastic it is in the 20s to be conservative and conservative numbers. So, since the past return looks very good in mid cap, small cap, people are coming in mid cap, small cap.

Surabhi Upadhyay: Continuing for infinity

Nimesh Shah: Nothing continues till infinity. So one is worried one is worried about the more rather than the FII selling, we are not talking about the leverage that exists in the country. Like the open interest position in stock futures is 2,60,000 crores. It was less than 1,00,000 crores in 2020. The open interest in call options is more than 2,50,000 crores, right, so that's the kind of number 1,50,000 crores which was negligible four years back in 2019 it was less than 10,000 crores

Surabhi Upadhyay: But this is not just retail investors taking leverage. This is general institutional leverage, right?

Nimesh Shah: A big percentage of that. Unfortunately, a big percentage that of retail investors. Okay, I don't know how many of those retail investors understand there's a risk they are running. How many understand that there's a leveraged position on the market and corrections can really seriously erode the wealth. And when SEBI study itself says that 89% of those investors are not making money. We have seen this cycle since last 30 years. It will ultimately when they lose money, they will get out of the market. So we should ensure that CNBC should ensure that more and more knowledge is given that 89% of the people lose money in August.

Surabhi Upadhyay: No, absolutely. We cover that, SEBI from time to time is coming down with orders etc., or you know pulling on certain individuals or for promising super high superlative returns that's been happening through. Now, let me ask you about, again to get back to the point of regular mutual fund investor looking for higher returns and therefore willing to take higher risks. Explain to us the concept of portfolio management services because now, a lot of mutual fund houses have this whole concept of PMS within the mutual fund entity. You do, you do too, at ICICI Prudential MF, right? So, explain this.

Nimesh Shah: Within the asset management industry, within the asset management industry, I've got one business which is called a mutual fund business, where I'm very clear risk management has to be much more conservative, because the customer can be ordinary retail customer. So, what we can do there is another instrument called as alternative investment funds or PMS.

Surabhi Upadhyay: Thank you, there you go. There's your coffee

Nimesh Shah: Where the ticket price, where the ticket size are slightly higher, right the minimum ticket size that you come in for a PMS is ₹50 lakh, correct right. So, the customer is clearly told that when he comes in a PMS or an AF, we will take the risk the same risk management framework which is applicable to mutual fund the same team is there but when they look at alternatives, they will try and see that maybe the risk is slightly higher. The concentration risk that we allow in an AI or a PMS, is slightly higher than what is allowed in the mutual fund. So, what do we have? We have got a central research team, which is doing we have shortlisted 500 stocks in ICICI Prudential, 496 stocks in ICICI Prudential which we research. Now, that research is available to the mutual fund side also, that research is available to the PMS alternative side also. They can take more risk and create portfolios for people who want to take more risk or more concentration risk. I think there is a risk return which is clearly explained to the customer.

Surabhi Upadhyay: The question that I want to ask, you know, understand the answer that I want to get to is whether as you've seen this business mature and I'm guessing three four years right? Whether indeed it is generating the kind of higher returns for which obviously this business takes higher risks. I mean, are you satisfied in general with the way PMS is performing? Not just yours, but our PMS is fulfilling their objective.

Nimesh Shah: Yet ICICI Prudential AMC over EPs and PMS have done fulfill the objectives. I'll just show you one particular slide which is very interesting in this context that we have gone in invested in B2B businesses. Three years back, we started now, we have about three years track record or overall we got to 20 years plus track record with the current team. We had given in 2018 January, we had returned the money. PMS AIF money PMS money, we are returned to the investors saying that the markets are very high, and you are made a fantastic return, take back your money. That's what we did in 2000. And since then, we have built up the business and it has given a fantastic performance to the final investor. We have invested in companies which are growing, which are throwing a nice amount of ROE, and still when you're getting into this companies today, you're going in at a lower PE ratios, right? The portfolio's PE ratio is still lower. So I am going and investing in stocks with the market has not taken a fancy to still now, right. Though they are growing and they were improving our ROEs every day. So till now the growth has happened because of growth in EPS. Right? Someday market will also recognize that these companies are giving consistent returns, fund managers who have not invested in B2B companies since last 15 years will also start investing in those companies. And you will see the further growth of this kind of companies.

Surabhi Upadhyay: We've seen that. I think capital goods the way the sector came back and sharing capital goods that we've seen some of this revival. Okay, now let me get down to brass tacks because this is what making investing a little simpler for people who are watching the show. You tell us looking at the market situation today. If someone is to put fresh money to work towards either a mutual fund or a PMS, what are the things they should keep in mind? How should they start? Should they stagger, given today's context of geopolitics, rates, etc, you know, whatever is happening around us.

Nimesh Shah: So without going into too much 'gyan' on where the market is and what our evaluation levels of the market end. So there are opportunities always in the market. But right now the way we are neither a very expensive market nor a very cheap market. I won't say that the markets are sitting on a bargain. Yeah, and the stocks are very cheap. It is difficult to get cheap stocks today.Right the way I invest every month right whenever my salary comes, a big percentage of that goes into investment. So what do I do if the markets are very fairly or low, slightly lower value, then I will take a equity fund. But right now, the way the market is and the way taxation has changed for debt, the only way to get that tax free is by investing in the dynamic asset allocation category, the balance advantage category, or the multi asset category. There are two categories of SEBI, that is the balance advantage category, and the multi asset category where you invest in debt since more than 65% is in equity, you will get debt. Also tax advantage, right? You are not taxed, the way debt funds are taxed. The taxation is equity taxation. So it is very good for the final investor. So, in markets like this, when there is no clear cut sign, I would go and invest in a category called as multi asset which is slightly more aggressive than balanced at 65% to 70% is invested in equities and the balance is invested in debt at both.

Surabhi Upadhyay: Okay, so you have exposure to all three asset classes. That is something that you would you'd sort of suggest and that's advice to an overall investor.

Nimesh Shah: My this month salary will go in multi asset.

Surabhi Upadhyay: Multi asset funds, now that explains why there is a plethora of these funds almost all AMCs are launching. If they hadn't had this category everybody's launching multi asset funds

Nimesh Shah: We had this category since 2004. It was called ICICI Prudential dynamic fund once upon a time, it was one of our favorite funds which was dynamically investing in equity and debt and from there we discovered this balance advantage category. It was the original category was this multi asset category. We have always believed in that because Indian markets will be volatile, and volatility is good, volatility makes you money. So, because the Indian customer will be procyclical, we have created this products which are counter cyclical, right? I am very proud to say that ICICI Prudential has practically created both these categories. And this is since 2004, that when markets go up, you reduce your equity exposure, when markets go down, you increase your equity exposure. So balanced advantage fund is much more conservative, the equity exposure would be around 40% or even lesser and multi asset fund it will be around 65 to 70%.

Surabhi Upadhyay: So, I know never to look at past returns when you make your investment decisions. But for just the sake of reference, average returns over a long period of say five years, 10 years. What is the average return that these two products have given? What is the reasonable expectation to have when you're getting into either multi asset or balanced advantage.

Nimesh Shah: So we have had a fantastic run and I will give you a slide for that also. Or you can look at the data and create a slide for that. It is so satisfying to see balanced advantage fund today after 10 years. And I know I remember I had a talk with you, 10 years back? So in 10 years, we would have almost given 90% of the Nifty returns, while taking only 50% of the risk. 90% of the Nifty returns by taking only 52% of equity exposure, that is a very satisfying line to give. So risk adjusted return that a balanced advantage fund has given over 10 years is so nice for the final investor what he was looking for. Even multi asset fund. Frankly people look at an equity return in multi asset fund and it is embarrassingly good. Because it is very satisfying after so many years after 19 years of performance of multi asset fund. It has given very good, it has given equity returns are much better than Nifty returns to the final customer.

Surabhi Upadhyay: Okay, so let me ask you this. If a seasoned investor, a mid-age seasoned investor has a corpus. These are two categories that you've given examples of, looking at the levels of the market. Now this this investor today has the money to meet the PMS threshold of ₹50 lakh let's say or maybe the lower threshold for this high risk category whenever it comes. What should one consider because I think there that's the dilemma that a lot of people in affluent mass affluent that you know, upper edge of the middle class, that's what they're facing. Should I cross over to PMS? Or am I just okay with my SIP or my mutual fund or my multi asset fund.

Nimesh Shah: Mutual fund is a great platform, right. Taxation-wise it is too simple and one should continue doing investing in mutual fund but for part of your portfolio where you want to be slightly more aggressive, where you are okay to take concentrated risk. Any asset management company with good risk management practices, like I'm not advertising but ICICI Prudential, will come with its own risk management practices which we have been following for our mutual fund. Slightly different but the same risk management team will look at it. It's very important to look at the brand that you're giving the money to. Right? It's all about people. Our business is all about people and the brand and the experience that we are given to the customers over a period.

Surabhi Upadhyay: Got it so I didn't have that food for thought people need to do their research and homework before they decide. Now let's come to the central issue, you know, we wanted you with your experience to give advice to our younger audiences. And young people who might be watching this on YouTube, on our digital platforms. What should one do? How do they start early? Or how can I don't know, I started with my first investment was an SIP with my salary check, I remember. So, is it still the same? What would you say?

Nimesh Shah: Yeah yeah, younger generation is way smarter. They have started investing much earlier, but only thing is they're investing into riskier products. Again, I'm talking about the options and futures in the market. And people have digitized and gamified the whole thing. But the first principle of investing that you should not lose money. And the second one is the you should not forget the first principle. Right. So I would be asking the younger generation to be more careful. While investing you should its hard-earned money and one should not and the power of compounding after investing for 30 years, I can say that the power of compounding is tremendous. Either do your own good research, and then invest in stocks. Just because somebody has told you it does not work. We have seen the market since 1992-93. And I have been consistently saying that people who go on somebody else's knowledge and go into direct stocks may or may not work out if you've got good research capability or you know some sectors well and you know those companies well, if you're able to identify good businesses, then go and invest in stocks directly or otherwise try and track some good fund managers where you would like to where you can trust your money. I am saying this business is of trust. And there is something beyond numbers where you will trust your hard-earned money for the next five years. Take a judgment on people and then give the money to the right people and then enjoy your life. Rather than worrying about this. Last one year a lot of people will start believing that they are good into markets, right? Because a lot of small caps and mid-caps that they've picked up have grown many times. Don't get swayed that you are a good stock picker. Ask yourself because this you create this hypothesis based on what has happened that you start believing. It is not that you are lying, you start believing because you got a four bagger that you've got some knack that you are able to identify. Ask yourself whether it was good research or was luck. If it was luck then ride your luck your return did well but then do some really good research and invest.

Surabhi Upadhyay: Keep yourself rooted. I guess.

Nimesh Shah: Yeah, it is very difficult. To be rational in irrational times is the most difficult thing in investment.

Surabhi Upadhyay: Interesting, lots to think about over there. Okay, now if you were to give me an investment tip, what would it be?

Nimesh Shah: ICICI Prudential Mutual Fund. All our funds do well for investors, they have done well for the investment.

Surabhi Upadhyay: You love your job; you love your company. No? It's so evident. On a serious note, any advice that you'd want to give out there?

Nimesh Shah: It's simple. It's our hard-earned money we should not lose that money, and markets are volatile. So, embrace volatility, be very comfortable in volatility and depending on India is a great story. Nothing is changing in that. So, five years, seven years invest with ICICI Prudential Money, we will manage your money carefully and will do good risk management on your mind.

Surabhi Upadhyay: Fantastic. Sounds good. Thank you so much Nimesh! Season's greetings to you. I really look forward to more conversations like this one. Thank you.