Growth of ETFs & Passive Investing in India | Mr. Vishal Jain, Head of ETFs, Reliance


Hi everyone.
Thanks a lot for tuning in. I’m Anugrah, one of the
co-founders at the smallcase, where I head the investment products team. And today we have a
very special guest with us, Mr. Vishal Jain. Thanks a lot Vishal for coming in. Thank you for inviting me. Our pleasure. Vishal heads the ETF and passive
products team at Reliance Mutual Funds. And he is truly been one of
the pioneers of index investing in India. In today’s conversation, we would
be asking him more questions about like what has been his journey
in the financial industry. What has been the evolution
of the mutual fund industry specifically about the ETFs. What do you think about future and let’s say everything in the investing. Sure. Like to get it started right, Like you have quite a very, like you have quite a fascinating journey in the financial industry, right? You started with ISL, like you were one of the
very first employees there. And you were also a part of the team which launched India’s first ETF, right? So why don’t you talk a little
bit about your background and how’s the journey been so far? Sure. So I passed out of my MBA college in 1996 and I joined a company called Skindia finance, and that company was also into indices. So my first job that I joined was in a company which used to calculate indices. So I don’t know how many of
the people are aware but there used to be an index
called Skindia GDR index. And at that point of time the
GDR’s were very popular in India. especially for foreign investors. And it’s an index that we used to create Okay, this is which year? This is a year 1996. Okay. And it was very popular
index at that point of time. Post that I joined Crisil in the index division. You know Crisil had a whole set of indices, called The Crisil 500 index. And a lot of sector indices that, actually at that point of
time no one used to calculate. Crisil then, had a joint venture with NSC, where they, you know set up
an independent index company called India Index Services And Products Ltd. And I actually moved in from the Crisil Team, you know, to start this venture way back in 97. And today it’s become what it is. Yeah. So NSC NIFTY indices are the most traded indices
probably in Asia today. Yes. Post my sting with ISL which was for about you know three years or so. I joined, you know, a bunch of friends who were setting up a mutual fund called “Benchmark mutual fund”. So technically I was the
first employee over there. And we launched our first
ETF way back in December 2001 called “Nifty Bees” And since then we’ve launched about 16 ETFs currently and we have about three billion dollars in assets, in ETFs at “Benchmark”. You know when we launched our first ETF for the first four to five years
we didn’t see too much of traction because India if you remember
was at a huge growth stage. And people used to sit back
and ask you questions as to, you know, why should I
invest in an index when India is growing at such
a high rate of growth, why should I be investing in indices? And that was a big challenge
that we faced initially, but one of the products which took off was a product called “Bank Bees”, which a lot of foreign investors.. Like when did you to launch “Bank Bees”? So Bank Bees I think we launched
somewhere in 2004 or so And it became I think a two billion dollar fund. You know by the time it was 2007, 2008 until the financial crisis that came. And that is what generated a lot
of interest in ETFs in India. In 2011 our entire ETF business that means benchmark mutual fund was bought out by
Goldman Sachs Asset Management. And the entire team, you know,
moved to Goldman Sachs Asset Management, and we were there for about five years or so. And the year 2016 the entire
team then got board out by, you know, Reliance Mutual Fund as, you know Goldman Sachs kind of wanted to get out of the asset
management business in India. Understood. And currently, like you are a
part of “Reliance Mutual Fund”, right? And they create mutual funds as well as ETFs and index funds also, right? So for everyone’s benefit especially for the retail investor, right, why don’t you sort of explain, what is the major difference
between a mutual fund and ETF? Well ! I would pose a
question a little differently. Whether it’s an ETF or a mutual fund, I think it depends on what
philosophy that you follow, so in this world, there are two schools of thought. One is what you call is active fund management. And one is what you call
a passive fund management. And what’s the difference between
these two philosophies? The difference basically is that in an active fund management, you have a fund manager, you know, who says look I have
the ability and the skill to beat the market, which is why you pay him
that high expense ratio, you know for all the active
funds that are there. So that is the philosophy
of an active fund manager when he says that look I have the skill, I have the ability, I have the knowledge to pick stocks and to pick,
you know, multi-baggers to pick winners, and give much higher returns
in what the index is giving, you know in general, what does a passive fund, what is the philosophy
in passive fund management? Passive fund management basically says that the price of a stock which
is traded on the stock market which is where all investors collectively come and price a stock. So the price which is
traded on the stock market is a price which is a culmination
of all the factors and all the news and all the views that are there in the, you know, in that particular stock at that point of time. So basically what passive philosophy says is that look there is no way
for you to outbeat the market because all the information that is there, is already consumed by the markets instantly. Right? And therefore how does one fund manager beat the other fund manager when you have the same pool of stocks with the same information
that is there in the markets. Right? How do you beat, you know,
how does one fund manager beat the other fund manager and therefore what does a skill
that one fund manager has versus another fund manager keeping in mind that the same amount of money is going in just those
many stocks that are there. We did a bit of analysis, you know a couple of months back. And we saw that there are
nearly 45000 companies in India, which are in the business of generating alpha. So you can imagine the amount of… 45000 companies? 45 organisations right from broking entities to asset management companies, to foreign investors, to provident funds, to, you name it all these companies are in the business of generating alpha. Just in those many stocks. Right? So you can imagine the amount of horsepower, the amount of brain power, that is going into…
There are a lot of company stocks that are liquid. Yes, that’s what.
45000 companies… So therefore in India,
data is now showing that it is becoming extremely
difficult to beat the market. Like when you say that the data is showing that it is becoming difficult to beat the market. Can you just tell like could you give some numbers that probably you would know because we keep hearing we keep reading that mutual funds have been outperforming indices and people should invest
into mutual funds, right? Like what does the data say? OK. So data can be played around with, if you saw historically what was happening, you had a lot of large-cap mutual fund schemes that used to invest a substantial
amount in mid-cap and small-cap companies and therefore a lot of… Its allowed? It was allowed earlier. So till about six months back until Sebi introduced scheme categorization, so prior to that if you saw most of the large-cap, blue chip I mean whatever you may call it all these schemes are nearly
30 to 35 percent invested in small caps and midcaps. while they were benchmarking versus the Nifty index. right? And therefore you know a lot of times there’s a very thin line between what you term as Alpha
and what you term as Risk. So it is basically a lot of fund
managers taking risk in the market and therefore outperforming the Nifty, It was an alpha in that sense. Now once scheme categorization has come, basically Sebi has now defined that if you are considering or if you’re calling a scheme a large cap large cap scheme there are those many companies that you can invest in. So large-cap is defined as companies between one and hundred, largest companies and mid-cap is defined as between 101 to 250 and small cap, you know, a company which have more than 251. So classification has now been you know categorized and every fund house has to
now follow that classification. And if you look at recent data now because of this classification that has happened you’ll find that a lot of fund managers majority of the fund managers you know, are underperforming the indices. Even historically if you saw even then scheme classification was not there. You should have a look at this Spiva report, so Spiva is a report that is independently made by Standard and Poor’s so its called Standard and Poor’s
index versus active report. And this report comes out every six months globally for different regions. So India, you know, this report has been coming
for nearly 10 years or so. And there have been umpteen occasions I would say that at least
80 to 90 percent of the times active fund managers have
underperformed the index. If you use the right
benchmarks that they are using. Understood. So like just for everyone’s understanding, right, when we say benchmark, is this that we are trying to compare mutual fund or its strategy against something? It’s like when you are running in a race, right? You say that okay this person
is first, this person is second, this person is third because
that is relative ranking. Similarly Nifty which is sort of
a benchmark index for India, right? Majority of the large-cap funds
compared their performance against the Nifty. And when we say that the fund is generating alpha, It means that fund, lets say that we see in the last year
fund generated an alpha of 2% It means that over and above its Benchmark, it was able to give to 2% data, am I right? For the same amount of risk that it takes. Exactly. So basically they’re playing in the same stocks and taking the same risk. Yes. So basically what you sort of told our listeners is that previously a lot of funds with like, where objective of the mutual fund
scheme was to invest into large-cap stock and the risk that you have in large-cap is obviously less compare to the risk
that you have in a small-cap or mid-cap, right? And large-cap funds were sort of taking
small-cap and mid-cap bets and then sort of taking more risk, which ideally they should not because that is not their objective, people have not given them money for that but that is now sort of corrected. And which will lead to them not
being able to generate more returns because they are not able to take more risk. That’s correct. Yeah. Cool understood. Do you think this was probably one of the reasons, why there was, mid-cap sort of
melted down in the last one and a half years, large-cap has outperformed
quite a bit compared to mid cap. No, I think there’s cycles, I think the cycle comes, every couple of years, where you will find, you know people, especially when
there are large events like elections coming in, you find people moving towards safe heavens which technically are usually large- caps. So you find that a lot of times
large caps will start outpacing mid-caps. And once they reach a certain valuation then you find the mid-caps then
catching up and showing the returns. So I think it’s a cycle. I think it cannot be that
large caps just keep moving up, without mid-caps sort of catching up. On the flip side, it’s wrong to say
that mid-caps never come up and you know things like that. So I think these are cycles. I think the market, you know,
is a very intelligent place. I think when the market sees value. I mean these stocks will start moving up. But like, just like, just to sort of build
on the points that you were talking about, right? If you look at the performance of the Nifty, which sort of represents the large
cap stocks in last one year compared to say a lot of large cap mutual funds. Nifty has more or less outperformed all of the funds in last one-one and a half years, right? So it’s the case for passive is just
becoming more and more stronger with time. That’s correct. I would tend to think that… I mean there are two or three factors that have changed in India
in the last couple of years. I think that SIP in the mutual fund industry
that is systematic investment plans is something that has pulled in a lot of people into investing in equity which was not there earlier. If you look at most of our
portfolios were always loaded towards real estate, gold, fixed deposits. I mean if you look at three of these asset classes, I mean they’ve not done you know
too well in the last four-five years. Gold is know picking up in recent times. But if you look at real estate fixed deposits, I mean there is you know it’s
not generating returns that it was historically. And therefore you’re finding a lot of money coming in through systematic investment plans. I think it’s a fantastic way for people to invest and to experience the markets, and people who’ve been investing
in the last three to four years, are, you know, reaping the rewards of that. Now if you look at the amount of money
that’s flowing into systematic investment plans nearly 8000 crores, you know, a month In addition what is happening is that the EPF which is the provident fund, where each of us as employees puts in money, you know is investing nearly 15% of their
incremental corpus into ETFs, into Nifty ETF’s. And I think that itself is about three to four thousand crores a month. So we’re talking about eleven twelve
thousand crores of long term equity money coming in from the retail public into the markets every month, month on month. So we’re talking about nearly you know
140000-150000 crores of long term equity money coming into the markets. And this money basically has
no exit at this point of time. Exactly. It is all long term money that you’re
looking at, 10 years, 15 years 20 years. And I think that’s a paradigm shift
that’s happened in the mind of investors where they’re looking at equity investments. You know in a long term
perspective which never happened before. And therefore now, you know once
investors have tasted equity felt the equity and got the returns that’s when they come back to me
and ask for, okay what more can I do? And that’s when passive funds
like index funds, exchange-traded funds, is what they start asking you now that what are the other products that
we have that we can invest in? That’s true. You sort of mentioned a very important point that recently EPF fund started investing into ETFs, right? It was never the case that the provident
fund was investing into equities, for that matter, right? And a lot of people who might have provident accounts But they would not know that their
money is actually getting into stocks, right? When someone goes to them and tells like, Why don’t you invest in the ETFs or stocks, they would say, no it’s too risky. But they will be like. “Ohh! PF is
the safest thing that we have.” But actually the PF, the provident fund
is also putting their money into a sort of index funds or passive funds, right? So like what do you think. Like what are the things that needs to be done in order to increase the retail participation in the ETFs. Because there’s still too less, right? Sure. So look when it comes to ETF’s, yes I agree that retail participation
has been slow to pick up. But that’s been the case I think globally I don’t think that there is any country where you know retail participation has taken up earlier. It’s usually institutions who get into this market first. If you look at even the way the
Indian industry is kind of structured, you’ll find that mutual fund schemes
are sold, they’re not bought. And therefore you know you have to
remunerate a distributor, right? And once you remunerate a distributor,
he sells a scheme for you. In an ETF we don’t pay commissions to anybody, right? And therefore as I mentioned to you,
ETF’s are bought not sold. And therefore you know retail participation
has has been slow to pick up. But if I look at the evolution
of the ETF market in India, It’s been, it’s is getting better every year. All right? So we see a huge amount of interest coming
in every year from a new bunch of people. One of the things that is triggering a lot
of interest into ETFs is also the government. The government has been very positive
about this particular product class. So you know if you look at one of the products
that we have which is called the CPS ETF. You know we introduced this product in 2014. You know with the government and the
government uses this vehicle for the disinvestment proceeds. And every time the government has a trench, there’s a huge amount of marketing push
that goes into selling this product And yeah, educating people and selling
this product to people in the market. And that brings in a lot of new investors into the market. What is also happened is that with the
scheme categorization coming in, in the last four to five months we’re
getting a lot of interest coming in especially from high net worth individuals, right? So there was a point of time when we
found only institutions, interested in ETF. Now you have high net worth individuals especially family offices looking at ETFs in a big way, because of the fact that
they’re extremely low cost and typically when a family office will put in money they put in money for the long term. So it’s happening in fits and spurts institutions are there in terms of investments
towards a mid segment. HNIs and family offices are now getting in And my belief is ,
its just a couple of more years, we will find a decent amount
of even retail investors getting hooked onto ETFs and passive products. So like everyone is saying that
ETF’s are the passive products, are the future. Let’s say Warren Buffett is saying the same thing. The Indian government is
saying the same thing, right? And I’m believing that you as a mutual fund organization
would also have a very bullish view, about the passive products and
ETFs coming into the market. Now you’re saying even the
family offices are getting interested So is this a matter of time when
like retail also starts picking up, right? So we as a company also, like
we work with different brokers, to provide smallcase, right? smallcase is basically a portfolio of stocks or ETFs, which retail investors can
use to take certain exposure, right? So what’s your view, right? If you try to, what’s your take
about products like a smallcase which provides an easy option, like an easy to understand
option for retail investors to take exposure to stocks and ETF’s. Would these products help the industry grow or would it be easy for retail to start
adopting ETFs through these products? Sure I think smallcase is a fantastic idea. I think that diversification is a very powerful tool. And therefore the ability to
create baskets is extremely important which wasn’t there earlier. It’s only through smallcase that people are able to create their own set of baskets and create a diversified
pool of securities invested. Instead of investing your money
in just one particular stock. Taking that one step ahead it becomes an extremely powerful
tool for people to use, when they want to take exposure to
a particular asset class. So for example with smallcase, as you guys have done for example you’ve created this product called, you’ve created this model
called All Weather investing. It’s a fantastic idea, because of the fact that at
no given point of time is anyone able to predict which asset
class is going to move, right? A lot of times you think
that gold is not going to move, it’s not moved for the last four-five years but it has done very well this year, right? Now think about, look at it from a perspective which was about a decade back in 2008, you know when the financial crisis happened. All of us know that the equity markets
crash to the extent of nearly 50-60 % Gold shot up at that point of time. Now imagine if you are able to plug in gold and you had gold in your portfolio, right? It would have cushioned you from that fall. And therefore no one is ever able to predict which asset class, whether
it’s equity, debt or gold which asset classes is going to pick up. And therefore it makes sense for you to invest in all these
three asset classes, right? And reap the benefits of each asset class because you don’t know who’s going to do well. And smallcase through this platform It’s an extremely fantastic concept
because you can invest in equity, you can invest in gold, you can invest in debt, right? And it makes it much more easier for a person to reap the benefits of all these four asset classes Yeah. And you as you, as you mentioned to me earlier, has been somebody can even do an SIP on it. Yes. So Vishal, we’ve sort of discussed
about the domestic market right? But internationally like ETFs have become a huge, big phenomenon, right? Everybody is just investing into ETFs, all big and most popular investors
are also talking about ETFs, right? How has ETF evolved globally, if you can tell Indian ETF investors? Sure. So globally I think there’s been a huge spurt, especially in the US. Let me ask you a question Anugrah. Which do you think is the most
liquid stock in the world, the most traded liquid stocks
say on the New York Stock Exchange? Probably let’s say like one of the
highest market cap stocks. Like, let’s say Apple or Microsoft… Google… Amazon… Well, let me tell you it’s an ETF. So there’s an ETF called spiders. It’s called SPDR Standard Poor’s depository receipt and
it trades 25 billion dollars a day. And the next most liquid stock if
I remember correctly is Bank of America which trades about six billion dollars a day. So that’s how big ETFs have become. The top, among the top 10 stocks
nearly 60 percent of the volumes come from ETFs now. right? If you look at assets and the management
especially in the United States the total AUMs of the mutual fund industry is about 20 trillion dollars. Which is approximately the size of their economy as well. Today ETFs command five trillion dollars. So already 25 percent of the assets
in the US are now linked to ETFs And this has happened only in the last decade. What I understand from people is that in the next 4 to 5 years this 5 trillion will move to 10 trillion dollars. So what we’re saying is nearly 40 to 50 percent of the assets internationally are going to be linked to ETFs. So that’s how big… It’s massive. they’ve become and the adoption
ETF’s not only through institutions, I mean it’s retail investors, institutions,
mutual funds, provident funds, a huge part , a large part of the investments
come from provident funds who are investing in 20 years, 30 years,
40 years because of the extremely low cost. Right? And therefore you know it makes sense for a lot of these investors to invest money at them. And therefore I mentioned to you, that’s how it’s become. It trades twenty five billion dollars a day. That’s a huge amount of money. Very few people know in India as well
today the largest mutual fund scheme is an ETF It’s a NIFTY ETF. So that’s how big ETFs are becoming everywhere That’s true. So before we end it, right? What advice would you want to give to
let’s say the young budding investor, right? How one should go about investing right now? I think two big things, one is… I think the Indian story is quite strong. I think all of us are very
confident about the fact that India is an economy which is growing and it will continue to grow at least
for the next decade or so. And as we even saw in, what the finance minister said in the budget that India is likely to be a 10 trillion dollar
economy in the next 10 to 12 years. And if India’s going to go from a 3 trillion
dollar economy to a 10 trillion dollar economy then I presume the markets
are going to do well as well. And if the markets are going to do well when we say the markets are going to do
well, we’re talking about the index. I think each of us should be investing in the index because you know as I mentioned to you that you know one of the big factors of
getting the investment right is discipline. Right? As SIP is also. So SIP brings a lot of discipline to your investment. And therefore investing in a very disciplined
manner, in a diversified manner, is something that will reap rewards over a period of time. And ETFs allow you to do that in a very perfect manner. And as you spoke about the fact that something like all weather investing which allows investors to invest in a pool of ETFs. You know investing in different
asset classes is something that investors should look at as you go ahead. So, therefore, your portfolio should
have a bit of large-cap a bit of mid-cap, a bit of debt and a bit of equity. I mean a bit of gold depending
on what your risk appetite is. So a simple number could be, if a person is a moderate investor who doesn’t want to take too much of risk and you know is not too risk averses well his portfolio could look like,
50 percent into equity, 25 percent in to debt and 25 percent in gold. And you know even in 50 percent of equity you can look at buying something like a Nifty ETF or nifty next 50 ETF or something
that you could make that combination with, 25 percent of debt, you could
look at investing in something like a guilt ETF which is taking exposure to government securities, and the gold portion can come through a gold ETF and therefore this brings
a big good basket of securities. And if you invest in this basket
over a period of five to seven years I think it will reap good returns as you go ahead. Good. So I think that probably my
takeaway from this session is that people should start investing into index funds. It is the next big thing. And it’s always good to keep
your eggs in different baskets. So keep your portfolios well diversified. One of the very easy
and quick way of doing that is is through our All Weather smallcase as Vishal mentioned, right? So just check it out. And Vishal, thanks a lot for coming in. It’s my pleasure. It’s a pleasure to have you there. Thank you. Thanks a lot. Bye.

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