#BQMutualFundShow | Nippon India Mutual Fund's NFO Nippon India Innovation Fund, an open-ended equity scheme investing in innovation theme closed for subscription today.
In conversation with Nippon India Mutual Fund's Sailesh Raj Bhan and DiVitas Capital's Gurmeet Singh. #BQLive
In conversation with Nippon India Mutual Fund's Sailesh Raj Bhan and DiVitas Capital's Gurmeet Singh. #BQLive
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00:00 Hello, welcome to the Mutual Fund Show.
00:01 I'm Nitesh Shah.
00:01 Over the next 20 minutes, we'll talk about thematic funds,
00:05 but a particular subset of thematic funds
00:07 in particular or in detail.
00:09 And that comes from the fact--
00:11 or that comes on the back of Nippon India, Nippon India
00:15 IMC, starting off or doing an NFO of a thematic fund, which
00:21 is based on innovation.
00:23 Now, our guests today will talk about what
00:28 is this fund all about, how applicable it is for investors,
00:31 is Gurmeet Singh.
00:32 But before I introduce Gurmeet Singh on the show,
00:34 let me first get in or make you hear
00:37 a slice of the conversation that I had earlier
00:39 with Sailesh Rajbhan of Nippon AMC.
00:42 He's the CIO there.
00:43 And I begin by asking him about this NFO
00:48 and what kind of investors would it be most suited for.
00:52 Hear him out.
00:54 The Nippon India Innovation Fund is
00:56 focused on choosing the kind of businesses which
00:59 will gain market share, will possibly
01:01 have the right to win in the next 10, 15 years.
01:05 Why this is important is what's happened
01:07 in India in the last, say, 10 years or in the last 15 years
01:11 has been-- a significant part of that
01:13 has been coming from the innovation not happening
01:17 in India, but happening abroad.
01:18 So you had got winners there, companies
01:20 which were global leaders in technology and all that.
01:22 And now you're finding that innovation
01:24 is starting to happen because tons of private capital
01:27 has gone into in the last 10, 15 years.
01:29 Large companies themselves are innovating
01:31 to be winning or having been ready for the change which
01:34 is happening.
01:35 And I think what happened in NASDAQ, say, the last 20 years
01:39 has clearly been the case of a different set of businesses
01:42 winning a lot more market share, a lot more market cap
01:44 effectively.
01:45 And we think a different set of businesses
01:47 in India in the next 10, 15 years will win that.
01:49 So this fund is to create portfolios
01:52 which capture the changing landscape in India
01:55 in terms of people doing investment in R&D,
01:58 people doing investment in--
02:01 ahead of time, creating new business models
02:03 which can disrupt the existing large leaders
02:07 in the marketplace.
02:08 And I think that is what this space intends to capture.
02:12 It's interesting because we see large companies
02:15 doing innovation.
02:16 We see startups doing innovation as well.
02:18 So in some sense, you will have the whole pocket
02:21 to choose from.
02:23 Interestingly, the spread will be across market caps.
02:26 And given that we are looking at companies who have, in a way,
02:30 established the right to win or creating an opportunity to win,
02:34 I think we require companies which
02:36 are investing meaningful amount of capital in R&D
02:39 or they have access to global R&D because of their parentage.
02:42 Or they have possibly, in some markets,
02:46 because of their business model, created
02:47 duopolies which will last longer than what we can imagine.
02:50 So this is the way we are looking
02:51 at the kind of businesses.
02:54 And like you rightly said, I think
02:56 a lot of established businesses will also innovate and change
02:59 their model.
03:00 And we have seen that happen internationally
03:02 fairly significantly in the last 10, 15 years.
03:05 Yes, indeed.
03:06 Your opening answer also spoke about an interesting piece
03:10 wherein you alluded to how the NASDAQ saw
03:14 the kind of rise of companies which were innovators
03:17 in a meaningful way.
03:18 Now I would like to understand from you,
03:20 I mean, when you were launching this fund,
03:22 you thought of some pockets wherein
03:26 the innovation in India is happening at a much faster
03:28 and a better clip.
03:29 So can you give us a sense of where is it that you
03:32 believe the funds exist?
03:34 And do you reckon that while you have access to
03:37 or the opportunity to invest across market caps,
03:40 that a lot of innovation is happening
03:42 at the younger end of the market cap curve?
03:46 Or is it not so?
03:48 So interestingly, many subsegments of the market
03:52 today are starting to see that and it's visible to all of us.
03:55 A lot of these new age companies which are now listed
03:57 have capital, have created market shares which
04:00 are fairly significant, and are growing at much faster
04:03 than average revenue growth in India,
04:05 and also getting to profitability fairly quickly
04:08 than what initially they would have thought about doing it.
04:10 I think that space is very interesting.
04:12 That is one space which is visible and here.
04:15 A large amount of capital which has gone into this space
04:18 in the unlisted side in the last 10 years,
04:20 I think all of them will be available for listing.
04:22 So I think it's a matter of time in the next 12, 18 months,
04:25 we would have a large number of these businesses
04:27 also coming for listing.
04:28 There also the focus will be on businesses
04:30 who have built the right to win and not
04:31 businesses who are just burning cash for the sake of it.
04:34 The second large segment is the multinational space in India.
04:39 See, India is becoming extremely relevant for global companies.
04:44 And companies which are today established
04:46 in India, multinational businesses
04:48 who have seeded their business for the last 20, 30, 40,
04:50 50 years, they are now at a takeoff point
04:53 because that is what is likely to happen when you set up
04:56 large projects.
04:57 You're doing a $5 billion project, $3 billion project,
04:59 $10 billion project.
05:00 And that's the scene of government investments.
05:02 Even private investments require significant areas
05:05 of investment in efficiency technology, which are not
05:08 easily available in Indian companies,
05:11 or at least smaller Indian companies.
05:12 So these global competencies and capabilities
05:14 are an important part we're going to play for this.
05:17 And this will be visible to us because certain large business
05:21 projects and all the scale at which India is doing now
05:23 is now comparable to the global project.
05:26 So you'll have some of these multinationals.
05:28 All business sizes today are very small,
05:30 even 3,000, 2,000, 5,000 crores.
05:32 Can be multiples of size in the next 10, 15 years.
05:34 So this is one space which is interesting.
05:37 The third area is all the new age--
05:41 not necessarily the listed companies,
05:44 but there are a lot of new age teams which are underway today.
05:46 So there's electric vehicle, significant transition
05:48 will happen.
05:49 All the energy transition space, there
05:50 is significant investments which will come about.
05:54 And this will feed into the manufacturing space as well.
05:58 So there is enough and more technology or differentiation
06:01 possible to either increase efficiency or drive growth
06:07 or possibly deliver new kind of services which are generally
06:10 not available to traditional guys who have not
06:13 invested in R&D.
06:15 The third space is select pharma businesses
06:18 which have built global capabilities,
06:20 not generally in the commodity space,
06:22 but more on the specialty side, are also
06:24 important and interesting opportunities there.
06:27 And lastly, there is a lot of companies redesigning
06:30 their business model totally.
06:31 For example, you have found some companies with a business model
06:34 which can have 5%, 10%, 15% higher growth
06:37 rate than the market or the competition in the same area.
06:40 And these sets of businesses generally also
06:42 tend to have higher profitability
06:44 because they are working in a very different way
06:46 and attacking the market very differently.
06:48 And some select business models like these
06:51 also are there where they have some permanent or material
06:54 long-term advantages which have been created.
06:56 So these four segments allow us to create a portfolio
06:59 in this area.
07:00 And like I said, tons of businesses
07:02 will also list in this area which will be important,
07:05 like software as a service as a category, which
07:08 is today not listed.
07:09 So you'll have a lot of this private capital
07:11 coming to public markets given that there is no more
07:14 the large amount of unlimited private capital which was there
07:17 in the last few years.
07:18 Yeah, most certainly.
07:20 Sinesh, a lot of government trust
07:22 off late is into pockets which will build the country,
07:26 infrastructure manufacturing, which is not necessarily
07:28 innovative, save for the processes that they do.
07:31 But it's a tried and tested process existing for a time.
07:34 So in some sense, would it be safe to assume
07:36 that a lot of companies that will be available to you
07:39 are not companies that are getting benefited
07:41 from external forces as much as doing or changing
07:46 the processes from within and making the whole landscape
07:49 their own?
07:50 See, that's a very interesting thing.
07:52 A sustainable edge is what is internally built.
07:56 And we've got, even in say new large projects which
07:59 are happening, government funded also,
08:01 the right to win exists with two, three players only
08:03 because very selective technologies are needed
08:06 which are not there across the board.
08:09 So those set of businesses who have a defined competitive edge
08:12 will also participate in this.
08:13 But these wouldn't be those traditional EPC businesses.
08:16 These wouldn't be project-oriented businesses.
08:18 These will be product and technology-oriented businesses
08:21 is where our focus is.
08:22 So if you look at it, today our indices comprise--
08:25 the larger indices comprise a lot of weight
08:27 from the traditional businesses, which obviously they
08:30 have their own right to win, their own growth rates.
08:32 But I think much higher growth rate
08:34 will be found in a universe which
08:36 has got greater investment in technology,
08:37 greater investment in futuristic businesses.
08:41 And that space gets left out in a typical diversified fund
08:46 because it doesn't have so much participation of the index.
08:48 So our attempt is to see where it can be four, five years ahead
08:51 of whether these possibly hopefully
08:55 will be having larger components and weights
08:56 and indices in the next five, 10 years.
08:58 So that's the approach.
09:01 Would it be a concentrated strategy
09:03 that you would follow?
09:04 Would it be diversified?
09:06 Yeah, so it will be diversified to the extent possible
09:09 within the team because out of the 10 sectors which
09:12 are there in indices, maybe five or six only
09:14 will be having a large number of innovation
09:17 or having a larger component of innovation within them.
09:20 So within that sense, it will have about maybe five, six
09:22 sectors at most points of time.
09:25 Maybe it will have between about 35 to 45 stocks or 40 to 50
09:29 stocks in terms of distribution.
09:32 So I would say attempt will be reasonably diversified
09:35 within the constraints.
09:36 So it will not be as diversified as an equity diversified fund.
09:39 And hence, we are positioning it and marketing it
09:43 as a thematic product.
09:44 So it does have a different risk profile
09:46 than a pure diversified equity fund.
09:48 But technically speaking, Sailesh,
09:51 it would have a lower risk profile
09:55 than a pure play thematic fund per se, right?
09:57 Because that is very, very vertical specific here.
10:00 At least you have both the market cap flexibility
10:03 but the sectoral flexibility as well.
10:05 Yeah.
10:06 So interestingly, it will not be narrow focus.
10:08 It's not like a specific single vertical oriented thing.
10:11 Hence, the diversification will be higher.
10:14 But it will not be closer to the large equity diversified
10:16 schemes or categories.
10:17 But it is certainly a midway between pure diversified
10:20 schemes and monolith sector thematic strategies.
10:25 Got it.
10:26 Last couple of questions.
10:28 Typically, I mean, and there are different kinds of fund
10:32 managers, but I know that different schemes have
10:36 different characteristics.
10:40 Would the nature of investments be such
10:42 that because you see innovation happening in a company which
10:46 might have fruit-bearing capability only 12 to 18
10:50 months down the line, that there might be a period wherein
10:52 the fund may go through a lull and then
10:54 have a big solid jake of effect coming into play?
10:57 Or do you hope to build a fund which
10:59 will have a slow steady growth almost every year?
11:04 The reason why this is being categorized
11:06 as a thematic strategy is primarily
11:09 to reflect this fact that this will not
11:11 be-- this will be a medium-term, long-term strategy
11:15 to be participated in.
11:17 And it will certainly have significant,
11:19 I would say, deviations from the benchmark, underlying benchmark,
11:22 given the nature of this product test.
11:24 And hence, you may have differences in performances
11:27 of this versus the benchmark.
11:28 The idea is, are we owning the businesses of the future?
11:33 That is the attempt.
11:35 And if we can have that, I'm sure equity diversified funds
11:38 also have.
11:38 But the proportion to which we will own in this
11:41 will be close to 80% plus of the portfolio assets
11:45 because that is what is the way we are defining the innovation
11:49 fund which we have.
11:50 So you will have, I think, to your question,
11:53 whether it will have a J-curve opportunity
11:58 or it will have flattening performance
12:00 in the near term and all that.
12:01 I think all this is possible.
12:03 But the approach is very clear.
12:05 Have a meaningful horizon of 5, 10 years
12:08 when you are taking this strategy as a part of portfolios.
12:10 See this strategy as a part of thematic investments,
12:13 not the basic diversified fund at the moment,
12:16 at least till the category really
12:19 evolves, till the innovation set of universe
12:21 becomes much larger.
12:22 And I think the attempt is the portfolio
12:25 should be very different from what
12:27 typical diversified equity funds today
12:29 reflect because their character is
12:31 defined by the specific categorization which is there.
12:34 Got it.
12:34 My final question, Sailesh.
12:36 And you kind of identified the risks out here and put it forth.
12:39 So that is kind of well covered.
12:41 Just trying to think, in some sense,
12:43 do you believe that the opportunity size of growth
12:47 for some of the companies that you are targeting
12:50 to be a part of this fund is multifold?
12:52 And therefore, in that sense, you
12:54 are willing to take that risk of maybe near term
12:56 performance as well because these innovation companies will
12:59 gain in a leapfrog in a big way if the bet turns out
13:03 to be correct.
13:04 So exactly that is the approach.
13:06 So the approach is clearly--
13:09 see, innovation in India is maybe, if you look back in US
13:14 and all, it's happened to a very large extent in the last 10,
13:16 15 years.
13:17 In India, it's just beginning to happen in the last 5, 7,
13:19 10 years because there are very few businesses that
13:22 have really invested large amounts of money in R&D.
13:24 And this space will be very exciting in the next 5,
13:28 10 years because a lot of companies
13:31 will be able to create products.
13:33 See, software as a service today virtually
13:35 don't have a company listed in that category.
13:38 And share of all the new technologies
13:40 in a lot of traditional businesses
13:42 is still very, very small.
13:43 So it's just evolving.
13:44 So I think the opportunity is large.
13:47 And it remains to be exploited and captured.
13:50 And I'm sure Indian businesses and Indian entrepreneurs
13:53 are there to make it happen.
13:54 And even a large amount of capital
13:56 has gone into private sites.
13:57 So I think the whole space is just evolving.
14:01 And like you said, many of the large technologies today
14:04 will be $100, $200, $500 million in sizes today,
14:06 which is nothing from the scale India is looking
14:09 to be in the next 10, 15 years.
14:10 So in that framework, the opportunity
14:13 is very, very meaningful.
14:15 VINEET BHAN: All right.
14:16 So that was Sailesh Bhan talking about the NFO
14:19 and its applicability and its various facets, if you will.
14:23 Now, because it's a, quote unquote, "a thematic fund,"
14:27 it's important to discuss this in conjunction
14:30 with what some of the other thematic funds may offer as
14:33 well, existing ones, and what kind of investors
14:37 would such a fund that Nippon has come out with
14:39 be applicable for.
14:40 To talk about that, for the first time
14:42 on the Mutual Fund Show, as well as on BQ Prime,
14:44 we have Gurmeet Singh Sori.
14:45 He's from Divitas Capital, joins us right now on the show.
14:48 Gurmeet, great having you.
14:49 Thanks for taking the time out.
14:52 GURMEET SINGH SORI: Pleasure.
14:53 Dr. Niresh, thanks for having me.
14:55 VINEET BHAN: No, the pleasure is entirely ours.
14:57 So Gurmeet, let's begin with this NFO first,
14:59 and then we'll move to thematic funds at large.
15:02 But what do you make of a fund offering
15:06 like this, which is thematic in nomenclature,
15:11 but from the looks of things has the optionality
15:14 of investing across market caps and across multiple sectors?
15:21 GURMEET SINGH SORI: Right.
15:22 So basically, today we live in a world of innovation, right?
15:27 And what this--
15:29 I believe what Nippon is trying to do through this fund
15:32 is they are letting the investors participate
15:36 in these exciting new opportunities of these forward
15:40 looking businesses, right?
15:42 And what is also being conveyed here
15:44 is that innovation is not limited to just inventing
15:50 or launching new products, right?
15:52 And they're also trying to dispel this misconception
15:55 that this only consists of IT companies, startups,
16:00 or small caps.
16:02 What is an offering here is they're basically
16:05 trying to encompass the various kind of innovations, right?
16:10 Be it a product innovation, business innovation,
16:14 or a process innovation.
16:16 To put things in perspective, for instance,
16:18 if I have to take a real world example,
16:22 there's a large fintech company, which basically
16:26 are financial services company, which
16:28 took a business which is decades and centuries old,
16:31 which is a lending business, and we did a product
16:35 with new features where there was no cost EMI.
16:40 There was quick dispersal leveraging technology.
16:44 And there was no cost of acquisition,
16:46 which basically was a hit with consumers.
16:49 And as a result, they gained a huge market share, right?
16:52 So it was not a new business.
16:54 So this is an example that innovation can
16:55 happen in an existing business, right?
16:58 Another example of a business transformation or innovation
17:01 would be where a company which started off
17:06 in the restaurants, then today is the largest food delivery--
17:09 one of the largest food delivery company, right?
17:12 So innovation can come in different businesses.
17:17 What I believe upon here is trying to do
17:21 is they're trying to launch a fund which captures everything,
17:26 right, which captures--
17:28 they're going to be focusing on high growth businesses,
17:31 high quality businesses, companies.
17:35 So if you see the innovation today,
17:37 all the disruptors, innovators, today
17:40 you're having a disruption in each and every business, right?
17:44 Look at the way we now look at banking.
17:47 So for example, if you see that I haven't visited my own branch
17:52 in the last 10 years because I can achieve everything
17:54 through net banking, right?
17:56 Look at the way today the OTT platform
17:59 has changed the way we sort of see entertainment
18:04 or the way we consume entertainment, right?
18:06 It has completely changed.
18:08 So this fund is exclusively going
18:10 to be catering or investing into the companies which are doing
18:15 some kind of innovation, right?
18:17 And it is not limited only, as I've
18:19 mentioned earlier, to the information technology
18:22 or the startups, right?
18:23 For example, we will also be looking
18:27 at MNCs, which have a global sort of research presence.
18:32 And they have a presence in India.
18:35 And they could leverage their global research
18:37 to scale up their business in India.
18:38 Sure.
18:39 And also, companies, if you see there's
18:43 a lot of private capital which has gone into these new age
18:47 businesses over the last few years, right?
18:49 So at some point in time, they will
18:50 be looking for a public participation, right?
18:53 These businesses are trying to sort of capture those, right?
18:57 Having said that, I must mention that these businesses,
19:04 as you will be investing to the new businesses,
19:07 so the investors who may consider investing in these funds
19:10 should consider a longer term horizon
19:13 as compared to your normal diversified equity fund.
19:17 Because when you're trying to invest
19:18 into the companies, future looking companies,
19:21 that adoption of technology takes time, right?
19:24 And for those businesses to actually scale and gain
19:28 a meaningful market share, it takes some time, right?
19:31 I think for that reason, the investor
19:34 should have a longer term horizon
19:36 when they invest into a scheme like these.
19:39 And this should be a part of their satellite portfolio
19:44 rather than being a part of their core portfolio.
19:46 OK, so not a part of the core portfolio,
19:48 but a part of the satellite portfolio.
19:49 That's part one.
19:50 And viewers, I think Sureshban also referred
19:52 to something like this only.
19:53 One quick question, Gurmeet.
19:55 And it's horses for courses, but usually people
19:58 say that, let's say, in a long term fund,
20:01 you do an SIP mechanism because you can't time the market.
20:05 Here, I'm hearing you distinctly say
20:07 that people should invest for the long term
20:09 because maybe a large portion of the gains
20:11 could be back-ended in that because things might take time.
20:15 Would it be prudent, therefore, to either do
20:17 an SIP, which is short term in nature, let's say one,
20:19 two years, if you will, and not for perpetuity?
20:21 Or even from a lump sum perspective,
20:24 for somebody who likes the fund, would a lump sum investment
20:26 right now be advisable simply because you get it
20:29 at the NAVs that you're getting when the businesses have not
20:31 yet captured in all the gains that
20:33 will come in at the latter half of their lifecycle?
20:35 I personally always prefer the staggered route.
20:41 I think looking at-- so it's very difficult to predict
20:47 future.
20:48 What is easier to predict is present.
20:51 So today, if you look at markets,
20:53 this company is not that we'll only
20:54 be looking at companies we're going to be listing in future.
20:56 This company is going to go ahead and sort of invest
20:59 the companies which are already listed and acquired.
21:02 So today, considering today's market scenario,
21:05 I personally would think that the SIP route
21:08 will be a better approach to investing in this fund.
21:13 Got it.
21:14 It is an NFO.
21:15 We have no yardstick of performance.
21:16 But I would love to understand, Gurmeet,
21:19 so you mentioned the positives in effect
21:21 because it's got the flexibility,
21:23 it's got the longer term tenor in nature,
21:25 you should do a satellite portfolio.
21:26 What are the risks to this investment?
21:28 What kind of investors should avoid investing in this fund?
21:33 Well, as I said, this business will sort of
21:37 be looking to invest into these new-age businesses.
21:40 As I said, when you're investing into these forward-looking
21:43 strategies, so adoption could be--
21:46 so it could take a longer period.
21:48 So investors with a very long horizon should come.
21:51 So people-- and as I said, it could
21:53 be a part of your satellite portfolio.
21:54 There could be volatility.
21:57 Because when you're trying to gain market share
21:59 and you're trying to do disruptions,
22:01 sometimes it takes much longer.
22:05 And markets sort of rewards immediate gains.
22:10 So from that angle, it could be--
22:14 you need to come with a very long horizon.
22:16 There could be volatility in products like that
22:18 because this is going into new technologies, new-age
22:22 businesses, and also those businesses who are trying
22:25 to disrupt existing.
22:27 So you need to--
22:28 existing business strategies, you
22:31 need to have a very long-term horizon.
22:32 So people who cannot stumble through volatility
22:37 should sort of stay away.
22:39 That's where also-- actually, I'll
22:41 go back to my earlier point.
22:42 That's where SIP sort of helps you.
22:45 So your investment is sort of going in a staggered way.
22:48 So you're not putting a big lump sum up front.
22:51 So that way is--
22:52 so when you get your sort of report six monthly, one weekly,
22:55 you sort of--
22:56 it's all right.
22:57 You haven't committed a big lump sum.
22:59 You sort of stagger your investment over the years.
23:01 And as these businesses mature and they deliver the results,
23:04 you will see the gains.
23:06 Got it.
23:06 OK.
23:07 Now, a final question, Gurmeet, and that is on--
23:11 because this is in the basket of thematic funds,
23:13 on thematic funds themselves.
23:15 What's your sense?
23:15 Because there's a clutch of them out there.
23:17 So are some of these impressive enough for you
23:22 to like them, part one?
23:24 And is there--
23:25 I don't know if you can, but how does this NFO stack up
23:29 versus some of the others?
23:31 Are there some thematic funds that you particularly
23:34 like because of the inherent characteristics or the fund
23:37 manager or the house or all of these put together?
23:41 Actually, we do a lot of thematic funds.
23:46 I think sometimes what happens is
23:49 that some of the things which are sort of underrepresented
23:52 in the index.
23:53 So from that angle, while you may invest in a diversified
23:56 equity fund, you may not be able to sort of capture
23:59 the whole gain that that sector may deliver.
24:01 So for that angle, the thematic fund sort of brings in--
24:06 and a good choice if one is sort of bullish on the theme.
24:09 There are some specialized sectors such as health care,
24:14 which offers sort of a huge sort of future potential.
24:21 So today, you may--
24:22 which are sort of underrepresented in index.
24:25 So in order to capture those themes,
24:28 I think you may need to consider thematic funds.
24:32 So I think whether that's health care or IT
24:36 or whether products like this innovation, which
24:38 are sort of like differentiated theme
24:39 and maybe underrepresented in index.
24:42 So those are the themes that, for one,
24:44 one must consider a thematic fund,
24:46 as long as it matches with their risk appetite
24:49 and their objectives.
24:50 Got it.
24:51 Thank you so much for these insights, Gurmeet.
24:54 Lovely talking to you, and look forward
24:55 to have you more often on the platform.
24:57 Likewise.
24:59 All right.
24:59 Thank you.
25:00 Viewers, thanks for tuning into this edition
25:01 of "The Mutual Fund Show."
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