Active Funds Are Still A Better Choice In India

Motilal Oswal AMC has crossed the milestone of 50,000 crore of Equity AUM. What goals have you set as a niche AMCs?

At Motilal Oswal AMC, we have always been committed to being a niche asset management company with a focus on long-term equity investments. Our strategy revolves around identifying stocks with strong growth potential that can generate exponential wealth for our investors over the long run.

Our primary goal is to provide unique and tailored investment products and solutions that align with our client's long-term financial objectives. To achieve this, we have a powerful investment team guided by industry veterans, including our Chairman, Raamdeo Agrawal and our CEO, Navin Agarwal. Also, we recently appointed Prateek Agrawal as Executive Director at Motilal Oswal Asset Management Company. Agrawal's vast experience in the asset management business, investment banking, advisory services, and sell-side research further enhances our capabilities to make informed and strategic investment decisions.

As we progress towards achieving our goals, our unwavering commitment to delivering consistent returns remains a top priority. To ensure robust risk management, we have made significant enhancements to our risk management frameworks. These improvements contribute to the overall efficiency of our fund management and have a positive impact on fund performance. We firmly believe that these changes will reinforce our ability to deliver favourable returns for our valued investors.

Ultimately, we aspire to be recognized as the go-to fund house synonymous with equity investments. Our focus on creating a successful wealth creation journey for our investors sets us apart, and we are committed to providing them with the best opportunities to achieve their financial aspirations. By staying true to our core principles and maintaining a disciplined approach, we aim to continue building trust and delivering value to our clients for many years to come.

Your recent Microcap NFO raised 120 cr. History tells us that retail investors are the first to redeem when the market becomes choppy. Are we witnessing something different in retail behaviour?

Indeed, our recent Microcap NFO saw remarkable success, raising over 120+ crore and becoming the largest domestic passive NFO for us. We are sincerely grateful to our partners and clients for their enthusiastic support and response to this distinctive offering.

Regarding retail investor's behaviour in times of market volatility, we have observed a different trend in recent months. Historically, retail investors were known to be quick to redeem their investments when the market became choppy or uncertain. However, the current market scenario has shown a notable shift in this pattern.

Despite the markets reaching all-time highs, there has been a slowdown in the pace of new demat accounts being opened and the number of active investors in the market. Typically, during market bull runs, we would expect to see an influx of new investors drawn in by the market's performance, but this time, it seems to be different. The surge in new investors does not match what we have seen in the past during similar market conditions.

An interesting observation is the net inflows into mutual funds. Contrary to what one might expect, we have seen stronger net inflows during periods of market decline, such as in February'23, compared to periods of market buoyancy like the current scenario. This indicates that domestic investors have matured in their investing approach and have adapted their strategies to capitalise on market volatility.

It appears that retail investors have become more discerning and tactical in their investment decisions, taking advantage of market fluctuations rather than being driven solely by market sentiment. This evolving behaviour demonstrates the growing financial awareness and prudence among retail investors, which is a positive sign for the overall stability of the market.

As a responsible asset management company, we will continue to closely monitor investor behaviour and market dynamics to better serve our clients and provide them with investment solutions that align with their changing needs and objectives.

Do you have any plans of launching funds in other sub-categories and strategies?

At Motilal Oswal AMC, we have a well-balanced product line-up that includes both active and passive investment options. Our active funds comprise 5 equity-oriented funds and 3 solution-oriented funds. We firmly believe in the philosophy of "less is more," and our strategy is to focus on these existing products, nurturing them to grow significantly and delivering consistent returns to our valued investors.

While our active funds remain a core focus, we also recognize the growing interest in passive investing. To cater to the needs of certain investors, especially those who are new to investing or seeking specific solutions, we are actively working on creating a diversified basket of passive funds. These funds will cover both domestic and international markets, providing investors with a range of options to align with their investment goals.

Innovation is at the heart of our approach, and we are dedicated to providing investors with unique and innovative ideas, such as our Microcap 250 offering. By continuously exploring and launching new product categories, we aim to stay ahead of the curve and anticipate emerging market demands.

Our experience with the Nasdaq fund offering is a testament to the potential of such initiatives. Over the last 12 years, the fund has demonstrated steady growth, particularly in the last 4-5 years, indicating its popularity among investors. This success reinforces our belief in building products that will remain in high demand and deliver favourable outcomes in the future.

As we progress, our focus remains on understanding investor's needs and evolving market dynamics to create products that cater to these requirements. By striking the right balance between active and passive offerings and providing innovative solutions, we are committed to empowering our investors with the best opportunities for wealth creation and financial success.

What is your asset mix between active and passive today? And looking at the trends in your estimate, where do you see the trend move to?

Currently, our asset mix between active and passive investments stands at 65:35. As a fund house, we firmly believe that India is an alpha market, meaning that active fund managers have the potential to outperform the market index. Our investment philosophy revolves around identifying opportunities where active management can generate alpha, thereby creating superior returns for our investors.

Compared to more mature markets like the United States, where around 40% of assets are invested in passive funds, the Indian markets are still relatively inefficient. This inefficiency presents ample opportunities for active managers to capitalize on market discrepancies and deliver value to investors.

While we recognize the growing popularity of passive investing, we anticipate that the trend towards greater adoption of passive funds in India might take some time to fully materialize. As the Indian market continues to evolve and gain efficiency, the role of passive funds is likely to grow, but we believe there will still be significant opportunities for generating alpha through active management.

What changes do you see in the distribution road for international funds?

The distribution road for international funds is witnessing significant changes due to increased demand for global diversification, facilitated by technology-driven access to international markets and a growing interest in passive investing and ESG-focused funds. Regulatory reforms ease cross-border investments, while customised solutions and currency risk management are gaining importance.

However, in January 2022, the Securities and Exchange Board of India (SEBI) directed mutual fund houses to stop taking fresh subscriptions in schemes investing in overseas stocks. This directive was primarily due to the mutual fund industry crossing the mandated limit of $7 billion for overseas investments.

In light of this restriction, the Gujarat International Finance Tec-City (GIFT City) has emerged as an attractive option for international fund distribution. As India's first International Financial Services Centre (IFSC), GIFT City offers a range of tax incentives and relaxed regulatory norms, making it a favourable hub for international fund distribution.

Asset managers exploring GIFT City can tap into a growing market of sophisticated investors seeking international diversification, thereby ensuring continued growth and adaptability in the evolving distribution landscape. At our company, we recognise the potential of GIFT City and the opportunities it presents in the international fund distribution space. As a result, we are actively exploring opportunities in this space to expand our international product offerings and cater to the growing demand for global investment opportunities among Indian investors.

You have such a long career and have seen continuous changes in the industry. How has the distribution landscape changed post-pandemic? What is the next change that you see going forward?

Wealth channels and distributors are increasingly focusing on digital use, data analytics, and artificial intelligence (AI) to provide tailored solutions to clients, enhancing the overall experience. They offer user-friendly digital platforms, AI-powered robo-advisors, and personalized investment plans based on data insights. Targeted marketing, enhanced risk management, automation, and continuous client engagement through AI-driven chatbots are also key trends.

Looking ahead, the distribution landscape is expected to embrace hybrid models, which will allow distributors to leverage the convenience and efficiency of digital channels while maintaining the personalized touch and relationship-building aspects of face-to-face meetings. Wealth channels and distributors will continue leveraging technology to deliver tailored solutions, adapting to evolving investor preferences. These advancements will shape the future of the financial industry, creating a more efficient and personalized client experience while also helping distributors stay competitive in a dynamic and evolving financial landscape.

What goals have you (as an AMC) set for yourself in the next five years?

In the next five years, as an AMC, our primary goals revolve around further growth and excellence. Building on our recent milestone of crossing 50,000 crore of Equity AUM, we aim to achieve even greater heights.

Throughout this journey, our focus remains on creating enormous wealth for our investors through long-term equity investments. We are committed to delivering consistent returns and maintaining robust risk management processes to ensure our client's financial success.

By staying true to our core principles and maintaining a disciplined approach, we are confident in building trust and continuing to serve our clients effectively. We are dedicated to bringing more innovative products to the market and providing the best opportunities for our investors to achieve their financial goals.

As we progress towards these goals, we remain steadfast in our commitment to delivering value and excellence to our clients, ensuring a successful and rewarding investment journey for them in the years to come.

Your Midcap Fund crossed 5K crore AUM and is one of the top performing midcap funds in the last 1 and 3 years. What are your views on the midcap fund?

Motilal Oswal Midcap Fund's recent achievement of crossing 5,000 crore AUM is a moment of pride and delight for us. This marks the second mutual fund in our portfolio to reach this milestone, and we are grateful to our partners and clients for their belief in the fund and their continued support.

The credit for this success goes to our talented fund manager, Niket Shah, whose strategic decisions and expertise have made Motilal Oswal Midcap Fund one of the top-performing funds across different time periods. The fund has delivered compounded returns of 21% over the last 9 years, growing investor's wealth by 5.6x times. It is immensely rewarding to know that we have been able to assist our investors on their wealth-creation journey.

Our Midcap fund is built on the foundation of our QGLP (Quality, Growth, Longevity, and Price) investment philosophy. Adopting a high-conviction approach with a concentrated portfolio of around 30-35 stocks, the fund stands out within the Midcap category for its uniqueness. This provides investors with access to a premium product that typically aligns with alternate investment strategies. In contrast, the category average would usually consist of over 60 stocks.

To manage risk in a high conviction strategy, we implement a rigorous overlay of risk control processes, with our aim being to deliver competitive risk-adjusted returns.

Notably, our conviction in the fund is evident through our ~30% Skin in the Game, which is a substantial portion of the AUM representing proprietary money. This demonstrates our alignment with the interests of our investors.

Midcap funds offer several benefits, including higher growth potential and sector diversification opportunities, as certain sectors are predominantly represented in the mid and small-cap segments, not in large caps. We believe that midcaps will continue to outperform the markets, given the growth-focused themes present in this segment.

Overall, we remain excited and optimistic about the future prospects of Motilal Oswal Midcap Fund and the Midcap category as a whole. Our commitment to delivering exceptional results and creating value for our investors remains unwavering.

How can distributors handhold investors through different market conditions? What is your advice for new distributors?

Handholding investors through different market conditions is a crucial role that distributors play to ensure that their clients remain well-informed, confident, and focused on their long-term financial goals. Some key strategies that distributors can adopt to provide effective support and guidance to investors include:

1. Educating investors with market insights and updates.


2. Conducting risk profiling and goal-setting exercises.


3. Encouraging portfolio diversification for risk mitigation.


4. Setting realistic expectations to manage market volatility.


5. Regular portfolio reviews and disciplined rebalancing.


6. Providing behavioural coaching to avoid emotional decisions.


7. Leveraging technology for real-time updates and insights.


8. Assisting with emergency planning for financial security.


9. Offering continuous support and proactive engagement.

By implementing these strategies, they can help investors stay informed, confident, and focused on their long-term financial goals.

My advice for new distributors would be to:

1. Adapt to Changing Times: Stay updated and upgrade your skills to meet client expectations. Prompt service delivery and self-learning are crucial for success.


2. Quality Advice Matters: In a crowded market with similar products, the quality of advice becomes a differentiating factor. Understand your client's requirements and provide tailored, quality advice to build trust and gain repeat business.


3. Leverage Technology: Embrace state-of-the-art technology to efficiently manage investment details, payments, and performance tracking. Technological advancements can enhance service delivery and performance.


4. Build Your Brand: Focus on brand building to gain customer trust and recognition. Train your team regularly and utilize social media platforms effectively to create awareness about your services and offerings.


5. Diversify Revenue Streams: Offer a diverse range of products beyond mutual funds, such as wealth creation products, insurance, bonds, and NPS. Creating new revenue streams can drive growth and stability.


6. Leverage Existing Client Base: Leverage your existing database of mutual fund clients to cross-sell other financial products. Offering a variety of products on a common platform can strengthen client relationships.


7. Regular Communication: Stay in touch with clients and seek their feedback on products regularly. The unique trail commission model in mutual fund distribution rewards consistent client engagement.


8. Client Experience Matters: Remember that the overall customer experience depends not only on capital appreciation but also on the services and support you provide as a distributor. Offer easy availability, investment advice, and seamless redemption processes.

By following these strategies, new distributors can pave the way for exponential growth and success in the competitive mutual fund distribution landscape.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully