After running a successful PMS for more than a decade, Parag Parikh has entered the competitive mutual fund space. However, he is not in the race to gather assets and does not consider existing players as his competitors.
How do you propose to manage the transition from managing PMS to a mutual fund?
We have grown gradually and organically. We started off as stock brokers and we were the first to start equity research. People wanted us to manage their money so we launched a PMS. We have Rs 350 crore assets under management in PMS. Our aim is to make a difference in this industry by being professionals. The industry is crowded with faceless organizations with deep pockets. Mutual Fund is just one business for these institutions. We found that that there is a need for a niche player which concentrates on just money management. That’s where we have an edge. Our PMS has done exceedingly well and our investors know that. Most of our investors will shift to mutual funds. So transition won’t be a problem.
We are not in the race to gather assets. Most fund houses aim to increase their assets as quickly as possible. Our aim is to manage meaningfully whatever assets we can manage. We won’t have any sales or marketing team so our expenses will be low which will ultimately benefit unit holders.
Ours is the only company which was built over a period of time. Today all other institutions are banks or are funded by private equity investors. When institutions make money management a business then it becomes a problem. Sales team gets money during bull run and fund managers have no choice but to buy stocks at inflated prices.
I will change the rules of the game in this market. A mutual fund need not be run the way it is being run currently.
How will you differentiate yourself?
Investors find stocks risky when nobody is buying and the stock prices are down. They find it less risky when everyone is buying and the stock prices are up. So mutual funds have to gather money when the markets are down and not in a bull run. On the contrary, AMCs sales team brings money during a bull run and gets huge bonuses.
We will not accept money during a bull run and when the stocks are not available at good valuations. Everyone talks about long term value investing but most schemes today are open-ended.
We will not have any exit load because it is our client’s money and they are free to move whenever they want. We have printed on our forms that investors time horizon should be at least five years. We don’t want investors to consider it as a short term fund. It’s not that people don’t believe in long term. Indians invest in small savings scheme, postal schemes, NSC, PPF, endowment policies, long term bonds, etc. But when it comes to investing in equities for a long term they are frightened by volatility. That is what we want to tell our investors that investing is all about long term. You cannot sow today and reap tomorrow. It has to pass through seasons. Similarly, investments have to pass through such seasons.
Are you confident of converting your existing PMS clients in mutual funds? What are your clients telling you?
Yes, we are confident of converting most of our clients into PMS. They have benefitted from our long term performance in PMS. Moreover, mutual fund is a more tax efficient vehicle for them.
Our mission statement is – “We create high net worth individuals. We do not chase them”. Through mutual fund, we want to use our expertise to help benefit small retail investors. We are expecting around 500 clients to convert to mutual fund. Over a period of time, out of the Rs 350 crore that we currently manage, around Rs 300 will be channelized in our mutual fund. We are not advising our PMS clients to do distress selling and invest in our fund.
Since you already run a successful PMS, will the portfolio of your mutual fund be similar to that of PMS?
Yes the portfolio will be somewhat similar since we believe in these stocks. If the fund manager comes with any new ideas, then we’ll include those stocks.
PMS is a personalized service. Will all your clients fit into one fund since their risk appetite and goals may differ?
We are applying the same principles of investing in mutual fund. We will apply behavioral finance strategy in managing our fund. Our clients who have stayed with us for more than 10 years have confidence in us. So we just have to tell them that mutual fund is a better way to participate in the market.
What kind of funds are you looking to launch?
We will only manage one fund as we don’t want to confuse investors. AMCs launch funds like a fad. We don’t want to be grocery shop. There’s only one right way of investing. You can’t have 20 ways of investing. In this scheme, our sponsor company, fund managers, senior employees including myself will invest. We may launch a debt fund in the next two or three years.
How are you planning to distribute your scheme? Are you looking to empanel new distributors?
We are not really interested in marketing our fund. I don’t have money to throw and get my product sold. Yes, we will work with like-minded distributors and pay them 50 basis points trail commission. We have capped our expense ratio at 2.50% under regular plan and 2% for direct plan. I’m not in a business. I’m in a profession. We don’t want distributors who want 2%-3% commission.
There are a lot of distributors who believe in what we are doing. Distributors are coming to register with us despite the fact that we are providing lower commissions. We didn’t have any distributors for our PMS. It was all word-of-mouth. We want distributors to ‘distribute’ the idea of long term investing. We want to work with well-educated advisors and not entities which have a pan India presence. Around 30 distributors have empanelled with us so far. I don’t want to cater to all investors. Even if a fraction of population believes in long term value investing then that’s enough for us.
So you won’t sell your fund through banks or national distributors?
They won’t sell my fund if I give them 50 basis trail commission. It is a business for them. I’m not interested in ‘selling’ my fund. We will make the product and performance so good that people will come automatically. I don’t think many fund managers today invest in the funds they manage. Even if they want to which fund will they invest in? They manage 20 to 30 funds.
Today most distributors recommend schemes which come with a track record. How do you plan to win their confidence?
I don’t care if distributors don’t sell my fund. Performance will be built over a period of time. I’m doing what I can do.
How will you tackle competition?
If I had launched a mutual fund 15 years back even I would have been sitting on a huge pile of cash. Established AMCs were at the right place at the right time. They have not done anything spectacular. I have no competitors in this space.
Will you deploy in house talent to manage your funds or are you looking to beef up your fund management team?
We have enough talent within the organization. I know how to do business. If research analysts were that smart then they would not have been working for AMCs. There are no geniuses in this market. You have to follow a good process. We are not in the profession of identifying stocks that will go up. We buy businesses which have characteristics like credible management, pricing power, good brand, strong distribution network, business which require least amount of capital and so on. Stocks have to be available at attractive valuations. We follow a bottom-up approach. We buy businesses which we understand.
You have written two books. Are you working on any new book currently?
Right now my focus is to make our AMC a sought after company in five years. We don’t want to be the largest AMC in India. Once I start my mutual fund, maybe I’ll write a book on our mutual fund industry.
What would be your advice to investors?
Think long term, expect reasonable rate of returns and invest your own money. Investment is a game of patience.
The original article could be seen here.