Retail investors’ adoption of SIPs will continue to grow: Anthony Heredia

What is your reading of the latest Sebi proposal and what do you think will be the impact on the margins and profitability of the various players involved?
Yes, this is probably the most significant event that has happened in a while but it has been telegraphed. The regulator has made it aware to all the people concerned that they are re-looking at this. I think for a while now, we have been prepared to expect lower TERs. There has been pressure on performance over benchmark etc. And the way I would look at it is a cliché but what is good for the consumer is eventually good for the industry. And I think what we are really excited about as an industry is the long-term potential in terms of volume. So I think volumes will continue to grow but at the margin, I think clearly there will be an impact on profitability but it is something that I think we have expected for a while.

Well, I am not sure if it was expected for a while by other players because for now the Street is reacting negatively. So whether it is HDFC AMC, Aditya Birla AMC, all of these counters are showing a bit of a red tinge. What kind of impact are we seeing on the mutual fund inflows at this point of time because the addition of demat accounts has slowed down. The SIP flows which was at record high of over 14000 crore has also ebbed and overall the retail participation was reaching a bit of fatigue, would you concur with my view?
I would broadly concur. I will just add some more colours. I think if you look at especially the last six to nine months in terms of flows, I think every month that you have seen a slight decline in the market; we have actually seen gross flows being relatively healthy. It kind of speaks, I think to the maturity of the retail investor.

And every single month where markets have gone closer to new highs is when we have seen gross flows come off. So I do not think, you are not seeing a change in the redemption numbers. I think investors are reasonably patient. But I do not think it is about fatigue. I think it is more people waiting on the side lines, preferring lower valuations. The other thing that I think we do not spend too much time acknowledging is that debt is a very credible alternative right.
Given that there is a view that interest rates have perhaps peaked out and FD rates are probably higher than they have been for a while you are seeing credible alternatives emerge, which I would say a year ago did not exist.

So I think a combination of the two means that for flows over the next six to nine months, I think we will continue to see a bit of dip in growth.

SIPs, I have a slightly different view. Some of these numbers are just circumstantial. A year back we had SIPs of 12000 a month, now we are at 14,000. I am very convinced that retail investors’ adoption of SIPs will only continue to grow and I do not see market levels and stuff like that affecting that momentum. Within the equity market, swhere do you think the value lies? Because at the start of the year, the midcaps and the small-cap index was languishing. In fact, the midcap index is 21% away from the life high level, so quite a bit of distance that it needs to catch versus Bank Nifty, which is literally near the record high levels. Do you think it is time now to perhaps get back into the midcap and small-cap space?
We are definitely seeing a large amount of interest from investors on small-caps maybe not as much on midcaps. But if I was to order priority in terms of investor interest, I would say small caps first, midcaps second, and then a combination of multi-cap and flexi-cap funds.

I think where we are seeing the least amount of interest is large cap. And I think small caps are seeing interest from two factors. One is, like you rightly mentioned, these are capitalisations that are probably most attractive from a valuation perspective. And the other theory I think that makes sense and plays out is over time especially over the last two decades, when you believe that you are at the end of an interest rate cycle and interest rates will ease, it tends to be good for smaller companies, for their businesses, for their earnings.

And I think if you take the two in combination, potential uplift in earnings from smaller companies and the fact that you have relative valuation comfort, I think that has kind of what is showing us the traction. I would believe for the next, I would say calendar 2023, we will continue to see that play out.

Okay, that is an interesting take coming in of where the market interest is because a lot of chatter around small-cap, as you pointed out. But let us get sector-specific. Within these small cap space or even the broader market, where is that you are seeing the maximum amount of interest or inflow happening as far as the sector is concerned?
If you look at the last two years, the sector that has contributed the most to earnings growth has been banking and financial services. And I think the play will now shift from the lenders to the borrowers.

So while we have had good earnings at a headline level, I think the breadth of earnings has left something to be desired. I think we will see better breadth of earnings. If you go by what I mentioned earlier, if rates are peaking out, we would believe consumer discretionary will continue to be something that one looks at positively.

Banking and financial services, like I said, earnings growth has come through, but I do not think it is completely captured in valuation, so we remain positive on that.

We like clearly the capital goods building materials space given the government’s emphasis on building infrastructure etc. We think that will play out as well. I think on a broader level, I will just make a comment. I think in the last 18 months, we have been a bit of a value market. I think you are starting to see growth sectors make a bounce back and that is where we are kind of looking at much more favourably. IT, pharma, some of the defensives, I think at best will remain a valuation call because there are clear headwinds in those businesses as we speak.