How a Japanese makeover is driving Nippon India MF's growth, rankings

That year, Reliance Mutual Fund (MF) embarked on an organizational restructuring— a journey that ultimately ended with the Japanese insurer Nippon Life Insurance buying out Reliance's stake in the asset management company (AMC).

It was also in 2003 that Sundeep Sikka joined Reliance MF, now known as Nippon India MF, in a senior leadership role. Sikka, now the executive director and chief executive officer, has been at the helm of Nippon India MF since 2009.

Some of Nippon India's MF schemes are very popular among investors. These include its small-cap mutual fund, which is ranked first in terms of assets under management (AUM). Earlier, the AMC itself topped the AUM rankings in the country but has slipped to fourth place over the years. It currently has ₹4.31 trillion in AUM held under various schemes.

Two decades ago, though, the company had in its earlier avataar as Reliance MF plumbed the depths. It has since made a recovery after the 2003 restructuring that brought in Sikka and other banking greats such as Amitabh Chaturvedi.

A new venture

Reliance MF started in 1995 as a joint venture between Reliance Capital, founded by the late Dhirubhai Ambani, and later led by his son and industrialist Anil Ambani. It was around this time that private MFs in the country began to offer Systematic Investment Plans (SIPs) for investors.

Reliance MF, too, had its share of MF schemes via debt, equity, hybrid, and retirement funds and offered SIPs for these schemes. The AMC, said some experts tracking the industry over the years, were initially focused on corporate clients and not retail money. Yet, it was unable to exploit the market and consolidate its growth. The decline started soon after.

It was in 2003, soon after the dotcom bubble burst, that Reliance MF decided to revamp its MF business. By that time, the AMC had already slipped to the bottom of the rankings. It then hired banking veteran Amitabh Chaturvedi from ICICI Bank to head the business as its chief executive. Sikka, who was the regional head at ICICI, joined in November that year and was put in charge of the Mumbai sales team.

Shailesh Raj Bhan and Amit Tripathi also joined the firm as fund managers at around the same time. They have since become chief investment officers of equity and debt respectively. Under Triphati, they suffered a massive setback when they were exposed to Yes Bank Tier-1 bonds and Reliance ADAG (Anil Dhirubhai Ambani Group) bonds.

The new management was in place by that year-end, but it had to find newer ways of pushing its products in the absence of a banking parent, unlike some other asset management firms. The solution — go all out to build relationships with distributors, better known as ‘independent financial advisers’ at that time.

Old timers in the industry still recall the partnership that Reliance forged with NJ Investments. NJ was inconsequential at that time but is now the biggest national distributor. “That was one of the most successful partnerships at the start," recalled Karan Datta, who worked as a competitor at that time for Axis Mutual Fund.

The revitalized fund house came up with strategies that drew the attention of retail investors. While the bigger AMCs were focusing on metropolitan cities, the new management at Reliance saw untapped opportunities in smaller cities and towns. Leveraging the household name of ‘Reliance’ and a good network of distributors, they started tapping small-town retail investors. And it worked. Besides, the firm could count on its star fund manager Madhusudan Kela—who had joined Reliance MF prior to the revamp.

The dynamic duo of Kela and Sunil Singhania, were renowned for their stock-picking abilities . Schemes such as the Reliance growth fund, managed by Kela, did exceedingly well and distributors were only willing to pitch it potential clients. “It was like the Mirae funds of that time," recalls Arun Kumar, head of Research FundsIndia. By 2007, the fund house had become the largest AMC in the country in terms of AUM.

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“In the asset management business, when you are so sales-focused, you also cross the line sometimes," said a former executive of a rival mutual fund company who declined to be identified. “But imagine the power of Reliance combined with the largest distributor network on the back of impressive performance."

The NFO blunder

It just took three years for Reliance MF to regain lost ground. Its success story within a short time of the restructuring became the talk of the town. Taking advantage of its growing popularity and reach, the firm decided to launch NFOs, or new fund offers, in 2006. That, in hindsight, was a catastrophe. The firm collected a record Rs.5,700 crore for its Reliance equity fund in 2006, the biggest ever at that time. It also launched the Reliance Natural Resources Fund and collected roughly around the same amount in 2008. But these mega NFOs came at a big cost in the wake of the global financial crisis in 2008, which resulted in massive losses for the investors in these NFOs.

“That episode taught me the lesson that we shouldn’t do mega NFOs and should instead focus on getting investors into existing schemes. Now we’re restricting ourselves from such NFOs," said Sikka.

Meanwhile, the company introduced ‘SIP insured,’ a financial product that had a mix of mutual fund and insurance built into it. In the event of an investor's death, the insurance would help the deceased's family to meet the financial goal for which purpose the SIP had been started. Mutual fund distributors immediately latched on to the ‘SIP insured’ guarantee, pitching the product aggressively to potential investors. The product turned out to be immensely popular. But, Reliance had to drop it midway in 2022 following a directive from the market regulator to stop bundling insurance and mutual funds.

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Another innovation from the fund house was the launch of an ATM card that allowed investors instant withdrawal of money from ATMs. The withdrawal was based on the funds invested in mutual funds but also came with a cap. However, the market regulator put a stop to it, saying fund houses cannot function as quasi-banking institutions. Nevertheless, all the new schemes helped the fund house get a large number of investors on board. By 2010, it became one of the first few AMCs to have an AUM of ₹1 trillion.

The Japanese skit

By 2005, Chaturvedi had already left and Vikrant Gungnani was heading Reliance MF. In 2009, Gungnani was shifted to a group-level position and Sikka took over as the CEO. At 36, he was the youngest chief executive to run an AMC. In 2010, Kela also shifted to a new role with the fund house's parent firm Reliance Capital.

Separately, Reliance Capital was looking to pare its stake in the fund house. Nippon Life sniffed an opportunity to tap into India’s young population and bought 26% of Reliance MF in 2012.

Following the stake sale, the fund house changed its name to Reliance Nippon Life Asset Management. (RNLAM) The new company embarked upon an ambitious expansion plan. Sikka spearheaded the acquisition of Goldman Sach’sasset management business in 2015 and this got the fund house access to various passive funds and ETFs (exchange-traded funds).

“If ETFs are good for investors and if I don’t give it to them, then someone else will," said Sikka when his critics worried about the low profitability of the passives business. At that time, the ETF business of Goldman had ₹7,460 crore in terms of AUM.

Within seven years, its AUM had spiralled to ₹1 trillion in AUM and the number of investors burgeoned to 10 million. ETFs currently form 26% of the entire AUM, and with this the fund house became the second largest passive and ETF player behind SBI MF. It runs the most popular passive schemes in the country such as the Nifty BeES, Nifty Bank BeES and Gold BeES. With this acquisition, Sikka proved his critics wrong.

In 2017, RNLAM became the first AMC in India to list on the bourses but its funds were slowly beginning to lose their lustre. The fund house took a huge bet on undervalued PSU, engineering, and infra stocks that underperformed. “These made no sense as these sectors were laggards due to poor economic recovery during the 2014-2019 period. This resulted in underperformance of funds during that period," said Nirav Karkera, head of research at Fisdom.

Sikka had other things to worry about. RNLAM had invested over ₹2,500 crore in tier-1 bonds of Yes Bank. The bank collapsed in 2020, and the consequences were grave for the AMC. The company also had very high and riskier exposure to bonds issued by Reliance ADAG (Anil Dhirubhai Ambani Group). The repercussions led the fund house to lose its top ranking and sink to the sixth position in terms of AUM by 2021.

Enter the Nippon

In 2012, Nippon Life bought a 26% stake in the fund house for ₹1,450 crore. But, the insurer wanted a bigger share of the pie. It gradually increased its stake, first to 35% in 2015. Subsequently, in 2019, Nippon raised its stake to 75%. It also helped that Anil Ambani's Reliance Capital was also looking for funds to clear debts. Post this, RNLAM was renamed Nippon India Mutual Fund (NIMF) and Sikka was introduced to the Japanese way of running a business.

The fund house did not effect any management changes, in line with the Japanese insurer's belief in stability and longevity. Yet, the focus was on making the fund house a ‘faceless organization’. Industry experts said the Japanese believe that systems, and not individuals, sustain businesses. So, the thinking was clear: To insulate itself from management exits, Nippon wanted the organization to do the talking and not individuals.

The new company also wanted to cut down its over-reliance on fund managers. This is because one of the reasons for the poor performance of MF schemes between 2014 and 2019 was attributed to too much leeway given to the fund managers. Currently, they have a 17-model framework for picking stocks. Fund managers have the freedom to work within the model but cannot bypass it. For instance, if the model recommends the purchase of 30% of some stocks, fund managers have to do so within the upper and lower limit of either 35% or 25%, respectively. On the debt side too, the fund house has restricted exposure to security papers that are rated AA and above.

The fund house soon reaped the benefits of these new policies. Nippon's small-cap fund, which has a unique strategy of investing in over 200 stocks and managed by Samir Rachh, is now a retail favorite. It is also the largest in the small-cap category. 

Rachh maintains a low profile, as does Shailesh Bhan, the equities CIO who, like Sikka, has spent more than 20 years in the company. To be sure, none of the fund managers command a cult following like Kela or Singhania.

The fund manager culture is gone and now they’re more about processes," said Kumar of FundsIndia. He added, “You don’t get to see much of them on TV. It's fine as long as the funds perform. But what will happen if and when things turn for the worse?"

Meanwhile, Sikka continues to aggressively follow the policy of getting new investors on board. He also wants to now focus on one area that has remained largely ignored: The more profitable alternatives business which was started in 2014. The fund house has not witnessed a surge in offshore money to its India-focused funds, despite the Japanese tag. Sikka, however, believes that he will be able to deliver on this count.

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