The Hindu Business Line : `Smaller players need to look at specific products, niche markets'

IN the eight months that Cholamandalam AMC has been left without a Chief Executive Officer, Mr Shashi Krishnan, Chief Investment Officer, has been leading the AMC.

He spoke to Business Line about the product strategy that will critical to take the mutual fund industry to the next level.

The market expectation is that the mutual fund industry will see a lot of consolidation in the medium to long term. Does this indicate that there will be no room for small players in the industry?

The consolidation strategy in the industry will not necessarily be that the big will get bigger. Actually, the medium and small sized companies have a greater need to get bigger.

If you look at the US market, top 5-6 players have 70 per cent of the market, yet there are about 2,500 players in the market. Smaller players need to look at specific products and niche markets. The key will be in adding greater value to the customers.

Even though everyone agrees that the formula to success is in creating niche products, the mutual fund industry in India is very lax in the area of product development. Why is there such a big gap between intention and implementation?

Fundamental problem is that the market is not mature. The level of awareness that is needed to sell specific products is very large. While there is a section of the population that is familiar and comfortable with mutual funds, it is a very small proportion of the population.

There are statistics that indicate that less than 6 per cent of Indian households own mutual funds. At the current levels of awareness, making new products doesn't make sense to me. We need to get to a certain minimum level of market penetration first. In the US, 40 per cent households invest in mutual funds. In India, even if we get to 20 per cent of households to invest in MFs, it will become a sizeable market. Until then niche products do not matter.

Is that not a chicken and egg situation? Presumably, more investors will join the MF fold if there are sufficiently exciting products.

We need a basic range of products to achieve market penetration. In a fundamental split of products between income and growth or open ended and closed ended, there are sufficient number of products in the market. You can have 25-30 products in your basket but then there will be really small investor groups who will be interested in each of these. The market is not ready for more product launches yet.

Are products sold to the right audience currently? For instance, monthly income plans, which are suitable products for the retail investors, still have a large percentage of the corpus continuing to be corporate investments.

I don't see any product as retail or corporate. MF as an industry is a retail industry. There are perhaps some money market products that could be used by both retail and corporate. I do not want to get into a debate as to which is a retail product and which is not. There is a set of people who are interested in these products and are buying them. This is specific to current market conditions and when the conditions change, they will leave.

In the long term you need to associate with investors who have long-term financial goals and these goals will be linked to the returns they get out of each product. The goal of corporate investment is not that. Their idea is not to hold that investment but to time it. To that extent, I will agree with you. We need to be cautious about investor class in the long term.

Right now, the industry is too immature for anyone to turn down a potential investor because they are not the primary targets for a particular fund.

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