Investors need to learn from what happened in debt funds in April: Kotak’s Nilesh Shah

By Malini Bhupta

Money in multi-cap schemes of mutual funds is currently at risk, as there is no clarity on the route each fund house will take to comply with Sebi’s new rules on these funds. Investors need to learn from the crisis in debt mutual funds in April, says Nilesh Shah, group president and managing director of Kotak Asset Management Company, in an interview with Malini Bhupta. Edited excerpts:

Can Sebi’s recent circular on multi-cap funds be seen in the context of smaller companies not getting enough capital and liquidity?

Sebi’s circular talks about ‘True to Label’ for multi-cap funds. In Sebi’s view, a multi-cap fund must have exposure to large-cap, mid- and small-cap stocks. The recent IPO of a mid-cap tech company was subscribed more than 100 times. It does indicate that there is enough money for quality company with good promoter in small- and mid-cap space. Sebi has taken several steps, including promotion of SME exchange and liberalisation of listing guidelines, for small- and mid- cap companies to access capital markets.

The regulator is giving fund houses several options, including returning money to investors, merging schemes. This is disruption at a time mutual funds are already faced with net outflows. For other schemes, too, has the regulator prescribed how much is to be invested in each category? Please comment.

From an investor point of view, ‘True to Label’ is a non-negotiable concept. We are in full agreement with Sebi on each fund category having ‘True to Label’ portfolio. It introduced categorisation of schemes to ensure ‘True to Label’ for various fund categories in consultation with AMFI and Mutual Fund Advisory Committee. ‘True to Label’ was achieved through minimum allocation to capitalisation, sector or theme. For example, a large-cap fund needed to have minimum 80% allocation to large-cap companies (Top 100 companies) at all point of time. In the multi-cap category, full flexibility was given to a fund manager to allocate across capitalisation. In a sense, they were flexible-cap category rather than multi-cap category.

Is the regulator doing this because small- and mid-cap companies are not able to raise capital and the liquidity in these stocks has dried up?

The regulator has taken a number of steps to deepen market and create easy access to capital markets. As mentioned earlier, market has appetite for quality small- and mid-cap company as reflected in recent tech company IPO over subscription. However, small- and mid- cap companies should raise capital on their own merit. When I started my career in early ’90s in merchant banking, a special exchange called OTCEI was created for small-cap companies. Every single company listed on that exchange became bankrupt in a short period of time. At Kotak Mutual Fund, we believe we have dual responsibilities. We have to comply not only with the letter but also with the spirit of the regulations. We also have to optimise risk adjusted return for our unit-holders. Compliance and optimisation of return are not mutually exclusive. They both need to be achieved.

How will this confusion impact investors, given that there is no clarity on what is going to happen to the multi-cap schemes?

There is a lot of discussion on the issue. We need to learn from what happened in the last week of April in debt funds. One fund house announced winding of six yield-oriented schemes. Their other equity- and fixed-income schemes were running normally. There was a lot of discussion about the same. Many investors, influenced by social media sermons, took emotional decision of rushing to safety. Some redeemed from equity funds, some redeemed from debt funds and some redeemed from credit risk funds. Fortunately, the panic was contained in few days with the support and guidance of regulators AMFI and MFDs. The lesson learned was that an investor who took emotional decision influenced by noise ended up redeeming at a much lower NAV / return. Investors who took a measured view, based on portfolio quality and liquidity, fared better from return point of view.

My humble submission to our unit-holders and partners is to stay invested in Kotak Standard Multicap Fund. This fund has created a fantastic track record through disciplined investment process. We will implement the circular with minimum disturbance to our time-tested investment process. We are thankful to Sebi for issuing a clarification on Sunday evening to reassure investors. We will engage with Sebi to ensure that we meet our dual objective of complying with regulations as well as optimising return for our unit-holders.