NJ India Invest is not content with just being India’s largest mutual fund distribution firm, with earnings of Rs 777 crore in financial year 2019-2020. It will soon start a mutual fund house of its own. The capital market regulator, Securities and Exchange Board of India (SEBI), gave NJ the license to start its own asset management company (AMC). NJ India will now compete with 41 other fund houses for investor assets. Will NJ be able to make a mark in the fund management business?
Seeking to be a ‘data-driven’ fund house
NJ seeks to specialise in passive funds. But given the rising number of index and exchange-traded funds (ETFs) that track indices such as S&P BSE Sensex and Nifty 50, NJ will roll out passive funds based on a set of rules. These rules are back-tested for performance over long periods. In MF parlance, these are called smart-beta or factor-based funds. “These funds will not actively select or reject any stocks, but will follow NJ’s internal rule-based indices,” explains Rajiv Shastri, who has been appointed to head NJ’s AMC foray.
Smart-beta funds use a combination of rules to pick investment ideas, without a fund manager getting into the picture. Although some fund houses have selectively launched smart-beta funds, NJ wants to specialise in this space. NJ feels it can expand this market. When private companies were just entering MF industry in the mid-90s, NJ India’s co-founders Neeraj Choksi and Jignesh Desai started distributing MF schemes from their office in Surat.
NJ has developed four single-factor indices. These factor indices are typically developed in-house – funds would then buy and sell securities depending on how these indices move. Instead of hiring active fund managers, Shastri says that NJ has hired a team of data scientists, programmers, financial market experts and specialists from developed markets to bring out indices with various combinations.
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Initially, NJ will roll out open-ended equity and dynamic asset allocation funds, running on its multi-factor strategies.
Will competing distributors sell NJ’s schemes?
By setting up a mutual fund house, it does appear to be stepping on the toes of the MF industry, whose products its distribution arm, NJ India Invest, sells. And being a mutual fund house, it would also require other distributors to sell NJ’s schemes.
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Being India’s largest MF distributor, Choksi knows that the fund house needs to make it remunerative for distributors to sell. By focussing on smart-beta funds, NJ mutual fund aims to outperform straight-jacket passive funds. In doing so, Choksi says their expense ratios would be slightly higher than most index funds and ETFs. “Our products will be priced between passive funds and actively-managed MF schemes. This will allow us to incentivise the distributors,” Choksi says.
But this won’t turn away investors, feels Choksi. “Retail investors do not invest on the basis of expense ratios. There is a need for easy-to-understand products, which are less-risky and can give reasonable returns,” he says.
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If NJ’s research clicks and brings in outperformance (only time will tell), Choksi is confident that fellow distributors would allocate a portion of their assets to NJ mutual funds.
However, NJ appears to be banking on its large army of 38,000 distributors (also known as NJ Partners) to also sell its own mutual fund schemes. Something that bank-sponsored fund houses have been doing for years. But Choksi says will be done on merit and not just because these are NJ’s schemes.
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By focusing only on smart-beta funds, NJ India aims to tread a path that only a handful of fund houses have dared to take. Benchmark mutual fund, which focused on passively-managed funds, mainly ETFs, sold its business to Goldman Sachs India AMC. Later, Nippon India AMC (back then Reliance Capital AMC) acquired Goldman Sachs India AMC in 2015.
In 2010, when Motilal Oswal AMC was launched, it initially attempted to focus only on ETFs. But it found few takers at the time and eventually the fund house rolled out actively-managed schemes. The fund house has again reenergized its passive fund division more recently.
Smart-beta funds are more popular globally with $1.05 trillion worth of investments or 12.6 percent of the total global pie ($8.3 trillion) in exchange traded products, shows data sourced from ETFGI.
To be sure, this is not the first time NJ will be managing money. It already runs a portfolio management services (PMS) firm that caters to high-networth investors (HNIs). It’ll be interesting to see how NJ expands the smart-beta funds market.