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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen. Good day, and welcome to Q3 FY '22 Earnings Conference Call of HDFC Asset Management Company Limited. [Operator Instructions] Please note that this conference is being recorded.From the management team, we have Mr. Navneet Munot, MD and CEO; Mr. Piyush Surana, Chief Financial Officer; and Mr. Simal Kanuga, Chief Investor Relations Officer. I now hand the conference over to Mr. Simal Kanuga, who will give us a brief following which, we will proceed with the Q&A session. Thank you, and over to you, Mr. Simal.
Thanks. Thanks, Nirav. Good evening, everyone, and I hope all of you, your families are able to manage the Omicron or third wave, whatever name we call it by. Most of the people in our company as of now are working from home. The transition to work from home once again has been smooth. I'll start with a quick update on industry numbers. We've always spoken about AUM and net flows. We thought it would be useful to throw some light on gross flows, especially on equity side of the business. For the first 9 months of the current financial year, gross flows into equity-oriented funds have added up to INR 4,273 billion. That is 33.3% of equity AUM at the start of the financial year. Net flows during the same period were INR 1,711 billion. That is 13% of the equity AUM at the start of the year. Equity-oriented AUM as at end of December stands at INR 17.7 trillion, up from INR 13 trillion at the start of the financial year. In the debt category, industry saw net outflows of INR 584 billion for 9 months ended December '21 and INR 539 billion for the quarter ended December '21. Liquid funds have seen net inflows of INR 359 billion and INR 333 billion for 9 months and the quarter ended December '21, respectively. We now move to AUM. We closed the quarter with an AUM of INR 4,367 billion, and the average for the quarter was INR 4,471 billion, with a split of INR 4,654 in equity to nonequity-oriented assets. We continue to service 98% of PIN codes across the country through our 227 branches and 1,207 employees. This would not have been possible without the efforts of our 70,000-plus distribution partners. Our market share in overall AUM stands at 11.7% on QAAUM basis and 12.9% if we exclude ETFs. On actively managed equity-oriented AUM, our market share stands at 11.6%, 14.6% on fixed income and 14.8% in liquid AUM. All these numbers are based on quarterly average AUM. Individual investors are now 59.4% of our total AUM. 5.7 million unique investors have trusted us with their capital. For the month of December '21, we saw inflows of INR 11.9 billion across 3.44 million systematic transactions. We launched 2 new funds during the course of the quarter. One was multi-cap fund and other, an index fund called HDFC NIFTY 50 Fund. The AUM of the multi-cap fund as of end of December stands at INR 43.53 billion. Over the next few quarters, we propose to launch a few more sectoral and thematic funds, index funds and also some ETFs. We are also exploring passive funds in fixed income space. We made an announcement in December of setting up a wholly owned subsidiary in IFSC, that is GIFT City, Gandhinagar. We'll be launching multiple funds to cater to international investors through this company. We hope to go live with this company during the course of the upcoming financial year, subject to regulatory approvals. We now move to financials. The overall financial performance of the company during the quarter ended December '21 is similar to the corresponding quarter in December 2020. The revenue from operations increased due to an increase in AUM as well as more remunerative mix, with higher percentage of equity AUM. However, this increase was tempered by a dilution in margins in some of the schemes. Other income for the quarter ended December '21 is lower than the quarter ended December '20. The company is in process of expanding its product bouquet. And consequently, there is an increase in expenses on new fund offers. There has also been an increase in routine business development expenditure, as the business moves towards normalization. In February of 2021, a grant of ESOP was made to certain employees, and the expense had employee benefit expenses include the pro rata amortization of the fair value of these ESOPs as required under the India's accounting framework applicable to the company. This is a non-cash charge, which is book value neutral. In third quarter of FY '22, this non-cash charge amounted to INR 173 million. As communicated earlier, employee benefit expenses have increased, as the company resumed its practice of annual increments and employee remuneration this year after taking a break from the practice last year due to COVID-19 pandemic. This is Piyush's last investor call as HDFC AMC's CFO. He leaves us on 31st of Jan, and Naozad Sirwalla takes over from him starting first of Feb. Naozad joined us in mid of December and has been working alongside Piyush for over a month. We also have Naozad on the call with us today. Naozad has over 26 years of experience and comes to us from Lupa Systems Investment Advisers. He has worked with KKR India for over 6 years, and prior to that, with Kotak Group, including Kotak Investment Advisers for over 13 years. Thank you very much for listening, and we welcome your questions.
[Operator Instructions] The first question is from the line of Dipanjan Ghosh from Kotak.
Just 2, 3 questions from my side. One, obviously, on the yield, if you see that -- If I look at the quarterly average AUM and look at the equity mix, that was increased by around 600 to 700 basis points over the past year-on-year. But the yields broadly remained flat. So if you could shed some light. My second question is, If I look at your core sequential increase in investor accounts versus your sequential increase in unique customers, there seems to be some dichotomy. So is it because in most of the NFOs or in some of the new fund offerings, probably the existing customers are contributing a higher share of incremental flows?And my third question is, if I look at your market share for the individual segment, active equity individual segment and segregate it into channel vice direct and regular, probably the market share losses in the direct channel has been significantly higher, be it in T-30 or B-30, compared to regular. So if you can shed some light as to what is happening in some of the direct channels and -- I mean, we saw the incremental flow through some of the gross flows to some of the digital channels. Is there some pressure on that? That's all from my side.
So first, on the margins, I think this is something that we have discussed many times over a couple of -- over the past couple of quarters. The challenge on this front has actually got further magnified, due to high gross sales in absolute terms as a percentage of outstanding equity AUM that the industry is seeing. So let me try and explain this to you with an example. So the size of equity oriented mutual fund industry is some INR 17 lakh crores or INR 17 trillion. Gross monthly sales are around INR 50,000 to INR 60,000 crores. So if you annualize that number, the annual gross sales is 35% of industry AUM. While net sales is approximately half of gross sales, which are like 17%, 18% of industry AUM or actually even lower. So just qualifying that the numbers I'm talking are purely illustrative and nothing else. See, industry as a whole is, say, making 70 basis points or so on equity-oriented AUM and 30 to 40 basis points on new flows, and net sales over the next 2 years is, let's say, INR 25,000 crores a month, that is roughly INR 6 lakh crores over these 2 years. So what will happen to margins? Assuming no mark-to-market gain, AUM will go up to INR 23 lakh crores or INR 23 trillion. But this AUM will have new flows of INR 12 lakh crores and INR 11 lakh crores of old AUM. That will be the breakup of the new INR 23 lakh crore number 2 years later. So industry will roughly have 50% allocation each from new and old assets. I repeat, I mean, just to qualify that the numbers I'm talking are like purely illustrative and anything else to explain the thing. And I'm probably oversimplifying things here, but this is the best way to explain what's happening. So it would be pertinent to note that lower gross flows or for that matter, higher net flows and the percentage of gross flows can alter the situation totally. Or for that matter, rapid rise in the market, coupled with lower gross flows can also make margins look very differently. The good news is the industry is realizing and pricing products better. What we saw happening with some of the NFOs in the recent past is now getting better. Our past experience over the last several years says that our way out of normal pricing, current, last forever. In fact, I would say that actually, high distribution costs will ultimately hurt distributors a maximum, because direct plans will become cheap and migration from distributor folios to direct folios may happen at a much faster pace. So I guess, key distribution partners are realizing this phenomenon. So what is our strategy in times like these? So we want to balance between 2 extremes. They are not keen to do business at any price. At the same time, we do want to not be away from all the actions. So doing much more on the other hand, to create the pull for our products via advertising, via communication, the new product launches that Simal talked about. In fact, we have done 6 NFOs this year, which would be more than what we would have done in the last several years, what we have done in the last 9 months or so. And our interaction, including the knowledge flow, working on our, let's say, the customer data platform, working on the partner integration through the API gateway, marketing, automation and so on. A variety of other things that we can discuss. Again, coming back to this pricing pressure in the market, we have lived through these kind of times in past. And look at what happened in 2007, '08 or for that matter, I think let's go back to even '99, 2000. I'm not talking from a market or valuation perspective, but the way mutual fund got sold. And as they say, history does not repeat, but it does rhyme. And lastly, we have all been hungry for growth and have actually paid for our growth. In fact, I would say about our industry that we are now $0.5 trillion industry. I'm talking about mutual fund industry in India, $0.5 trillion of AUM. But if you look at the profit pool, I mean, it's around $1 billion of profit. I would like to believe that with more players getting listed and some of the listed players with strict margin discipline, we change the way we do our business, and it's just a matter of time is what I believe.
Sure, sure. And on the second question, I think the difference between portfolios and customer accounts, unit customer accounts, sequentially, looks a little bit different. So is it that on the NFOs, probably, we are kind of getting a lot of the older customers are kind of getting the flows out there?
Some bit of on that account, some of it, maybe, some of the older people may have booked some profit. So net-net, I think the growth in folios as well as unit account is almost same. Yes, the other observation is right.
Sure. And lastly, one question. If I see your market share for the retail and HNI segment in actual equity and break it across channels, regular and direct be, its T-30 or B-30, we have seen moderation -- much higher moderation in the direct channel in terms of our market share compared to in the regular channel, I'm specifically talking only for the retail and HNI active equity sector. So just wanted to get some perspective as to what is happening on those channels and how you think about it, going ahead?
So direct also include fintechs, as they are the RIAs and feed money into the direct plan. And over the last couple of quarters, in fact, very pronounced in this financial year so far, as well as in the last financial year. Not so much the year before, they are growing at a rapid pace. And just let me give you some industry numbers here. This is some broad estimates from the data that we have. The total AUM of theirs is around INR 55,000-odd crores, of which INR 40,000-odd crores is in equity-oriented funds. More relevant point is that fintechs, as a group, have registered over 6 million SIPs in the first 9 months of the current financial year. So there is a key distribution channel. And I think, at our end, I think we are trying our best to integrate our platform with theirs. We have the partnership with all the key fintechs. Our teams are working on building this further. But just to keep one thing in mind that some of the products which are getting sold there, for example, I mean, one of the highest selling product on these platforms over the last few months has been technology funds, a product that we don't have. We have seen that over a period of time, it's important that we have the right set of products for our customers. And the majority of these fintech customers are young and first-time mutual fund investors. So another big focus at our end has been on the investor education and investor awareness campaigns, et cetera. How do we ensure that we sell the right product to the right investor? And over a period of time, I think we also believe that our market share within these platforms should also go up compared to where we are today. Otherwise, in most of the other channels, I think we would be in line with the industry. Of course, I think you need to keep in mind that a couple of banks sponsored AMCs have an advantage where there could be a guided or there could be a closed architecture when it comes to the products sold by them. But if you adjust for that, then yes, I think we would be in line with the industry.
[Operator Instructions] The next question is from the line of Ansuman Deb from ICICI Securities.
Yes. My question was regarding the -- our initiative on the passive side. We have been taking some steps on that for the last 2, 3 quarters, and you also mentioned some of them in your introductory comments. If you could give some more color in what is our strategy on the passive side, both on ETF and alternate space. And what portion of the -- what portion of revenue or what kind of business we can look from this segment maybe in some 3 to 5 years outlook?
So on the passive side, I think we have been repeating it over the last couple of quarters that, I mean, at the outset, I'm a strong believer in active management. And as an organization, we have stated this earlier, and we'll go to repeat that if it comes to it, maybe with the last men standing in terms of active management. We will leave no stone unturned. We'll put in all resources required, management benefit to sum it up, I mean, whatever required to create value for our customers. Having said that, there is a segment which is looking at options on the passive side. We have been filling up our product booking. For the last few months, we have done 2 index products. We have got approval for 2 more index funds. I mean, NIFTY 50 and NIFTY 50 Equal Weight, that will be launching soon. We've got approval for 9 ETFs that will be launching for the next several months. We are exploring the ETFs on the debt side as well. Silver ETF is another category where we would like to be present. So I think, there is a whole game plan in terms of filling our product booking on the passive side. And I would say that we would like to be a relevant player on the passive side and a dominant player on the active side, simply because we also have to keep in mind the pricing and the margins on the passive side and won't like to grow the AUM just for the sake of it. I think, the HDFC group [indiscernible] won't allow us to do that. But we want to ensure that we have the full product booking. We remain a one-stop shop for all kinds of solutions, be it in the active space or in the passive space for our partners, for our investors. And doing everything possible to get a relevant, I would say, a share on the passive side as well.
Right. And just one -- so basically, in terms of the -- you're saying we will be a relevant player; I get that sense. And -- but in terms of infrastructure, in terms of employees, all kinds of requirements are already -- we are all ready with that, in terms of these new initiatives?
Yes, absolutely. I mean, we have a fund manager who's been a veteran in the passive space for a long time. Historically, maybe a couple of years back, this market was very small. Initially, it grew mainly because of the flows from the couple of institutions, which were a mandate to few AMC. But as the market is expanding, I think we are looking at everything to ensure that across all channels, as well as -- I mean, in the all-investor segments, we have the right products in place. We have the right processes in place to reach out to all investors on the passive side as well.
[Operator Instructions] The next question is from the line of Aditya Jain from Citigroup.
Thank you. Thanks for that explanation on the impact of the NFOs. Just a follow-up on that. So if you think of the impact of this on the financials, would you say that a lot of that is already in the AUM? So the reason I might say that is, as an example, the multi-cap fund was launched in the middle of December quarter. So while there is INR 4,300 crores AUM, at the end of the period, maybe share in the average AUM might be much lower. So in that sense, would you say the impact of this sort of pricing pressure, it's yet to come? And could that lead to a drop in yield in 4Q onwards?
I think it's a matter of various things, as I mentioned earlier. It will depend on the nature of gross flows as well as the net flows, how much gain comes from MTM versus the flows. So all of those kind of things. I think NFOs have a certain kind of pricing pressure versus the existing fund. Within the existing funds, there are -- I mean, the margins are different for various funds. As well as I said, I think if the market grows -- I mean, market delivers higher MTM gain versus the flows, the picture would be slightly different. There has been a highly competitive pricing on the NFOs over the last couple of quarters, which I talked about earlier. And we are hoping that over a period of time, industry will realize that we need to have more discipline on that front. And I guess, that should happen sooner than later. And broadly, I mean just to -- I mean, I have to make one point that there is a difference between the margin that we have on the book versus the margin that we get when newer flows are coming in, and we need to keep in mind. And again, when I say the new flows within that also, NFOs versus the existing fund. So we need to keep that in mind. Yes.
Great. Yes. So that's what I was asking towards that -- the impact of the new flows could it make a difference next quarter. Okay. On the second part, the second question from my side, if you could just talk about the yields on the sort of not purely passive, but things like the equal weighted index fund, which is not completely passive, but you could say some sort of layer on top of passive. What kind of yield do these contribute?
So Aditya, on the TER of the equal way direct plan is at 40 basis points. So the yield would be somewhere around 32, 33 basis points.
Okay. So somewhere between a passive and an active equity?
Actually if you say active equity and NFOs there, I think cheaper than these days. But yes, I think you look at it this way, like the NIFTY 50 index fund, we run a direct plan at 20 bps expense TR, while the equal rate is at 40 and the NIFTY Next 50 is at 30.
[Operator Instructions] The next question is from the line of Mohit Surana from CLSA India. Mohit, sorry to interrupt, your voice is breaking terribly. May I request to come in a better reception area, please? The next question is from the line of Prayesh Jain from Motilal Oswal.
Just a couple of questions from my side. Firstly, we've seen a lot of outflows in the debt segment overall for the industry. Could you cite some reasons for it? And how do you see the trajectory going ahead for this? And my second question will be on the expenses, as to how do you see the expense trajectory for HDFC AMC going ahead, now with the kind of new NFO launches? Also, some a bit more on employee, where are the employee additions? And how do you see that trajectory going ahead? So these are my 2 questions.
On the debt side, I think over a period of time as RBI takes away the excessive liquidity that got pumped in post-COVID, I think that will reflect, maybe, a bit of like, CapEx starting at some point in time, the corporate money, which is there missing. And maybe, some of the other instruments, for example, having some bit of money may have moved to like the debt ETFs, et cetera, from the actively managed funds. But otherwise, no larger trend that we can see on the fixed income side. In fact, at our end, we are seeing incremental flows. Of course, it's trickling in, not very large, into the credit risk fund and a risk appetite comes back and people are looking at the top-notch players who did extremely well during the entire credit crisis period. So we are seeing positive stores in that particular front and a few other fronts. But broadly, if you talk about the industry numbers, I think we have seen a decline in that area. Your second question was on the overall trajectory in terms of people. So we would have added -- I think we added our CTO. We will be adding more people on the technology side, on digital side, on product, marketing, some of those. But otherwise, from an overall headcount perspective, it won't have changed much. Within that, as I said, some of these areas, which are high focus areas for us, we would have seen people addition.
Okay. Just coming back to the debt flow. So in the past, like over the last decade or so, we would have seen this debt AUM growing at a decent 10%, 12% CAGR. Do you think that, that kind of trajectory can unfold in the next 2 years as well?
So if I look at the overall size of bank deposits in India versus the debt mutual fund, and your observation is right. In fact, that percentage hasn't changed. The growth has been more or less in line or maybe slightly lower at times than even the growth on the bank deposit side. So there is a long way to go. I think, for the last few years, we have seen significant acceptance of equity as an asset class among the retail investors. The SIP flows that we see are primarily in equity fund or hybrid funds. But I think several of us have grown seeing recurring deposit as a product, which was also kind of an SIP in fixed income. That's a concept which hasn't really taken off. But I guess, for a set of investors that could also be an interesting product. I think, as in AMC, we are also thinking of working on that. And I agree with you. I think in line with the overall deposit growth, I think the -- that should be there. In fact, it should be higher than that because the mutual funds are clearly -- provide a good and convenient, diversified, highly transparent, I would say, product on fixed income investing as well. So there's a lot of potential on the retail penetration of fixed income as a product category.
Okay. Okay. Sir. And then just coming back to the expense part as well. If you look at our OpEx per AUM, OpEx upon AUM, we are roughly around that around 12 in terms of that. So do you think that you will maintain this or it can trend higher? We've been in that 12 for the last 3 quarters. So do you think that this will grow higher, or this will be at this level and the EBIT is dropping the level or EBITDA margins to decline?
So I think for some time, we should -- it should probably remain at this level. Of course, here, you would have to take into account the ESOP cost, which is at 1 bp, which -- that charge kind of -- whatever we have until now runs out in the next month. So there'll be a little bit of a dip because of that. But otherwise, we're also investing in other things like technology, a little bit more on people here and there. So roughly, we should be there before it starts going down again.
And then, when do you see this trending down? The 3-quarter focuses?
Let's say 1 year, 1.5 years, probably 2 years. Because we still need to -- we are putting in a substantial amount of money in business development costs now.
The next question is from the line of Ritesh Badjatya from Asian Market Securities.
Sir, we have seen a good amount of the inflows across the industry the last couple of years and equities accepted and et cetera, as we also mentioned in previous consultants. I want to understand in the present situation, how do you face this deployment challenges? Because at one end, Central Bank across the world is in the mood of pricing interest rate to counter the inflation. And that is having the implication of the fixed income market and also on the equity side. So how do we mitigate this transformation time, obviously, but how do you face the investors this time and how do you address your investors like ?
I think we invest -- the investor universe is expanding at a faster pace than the money that's been flowing to us. We are still a very small percentage of the overall free float market cap in India. I mean, if you compare us with, let's say, some of the other developed markets, I think the total AUM available to invest in mutual funds in India is substantially lower. And as -- I mean, without taking names, you would know better, the kind of new players who have been getting listed over the next several quarters, the amount of new listings that one can talk about. So we haven't reached that stage where I think there is -- I mean, there is a lot of money chasing few stocks. In fact, as the rally gets broad-based, the investment universe is only expanding. In the existing universe as well as the newer listings that are likely to happen over the next several quarters or other years in India. So we have a long way to go in terms of the capacity of the mutual fund industry to deploy money.
Yes. But sir, if we look at last 2, 3 years' performance, and we've also seen action is very much concentrated in a couple of the stocks. So does the industry take some more time or how do you ?
It's actually changing. So of course calendar year 2018, '19, '20 were the years where you're absolutely right, a couple of top stocks accounted for bulk of the market return. I mean, if you take the NIFTY, the top 5, 7 stocks would have accounted for maybe anywhere between 70% to 100% of the returns. But since last year, there are areas becoming more broad-based. In fact, that is also reflecting in our performance. And in our year book, I think there's a beautiful slide on that, that how active managers have done well in part whenever we have seen a more broad-based rally, and this time, it's more different. I think the alpha generation across most of our schemes has been quite good in the last year, 1.5 years, as the rally are areas becoming broad based. So that's the point I made earlier, that investable universe is expanding rather than shrinking, if there's a fee up.
Next question is from the line of Mohit Surana from CLSA India. [Operator Instructions] Mohit Surana, can hear us?
Yes, I can hear you. Can you hear me?
Yes. We can hear you.
Sir, my first question is that obviously, you said on an industry level, NFO flows are coming at a lower profitability. So my question to you is, will you not, at some point in time, increase the expense ratio on these funds because otherwise, then it will lead to cannibalization within existing schemes, right?
I mean, expenses issues are at GAAP. I think it's the function of the distribution cost that has been paid in these NFOs. And you are right. Over a period of time, as flows come in at a lower cost, as we see more discipline coming in, in terms of pricing, obviously -- I mean, I would say, hopefully, you will see better margins in these products as well.
Understood, sir. Sir, the second question is on alternative strategy. Obviously, in the past, you said that you are on drawing board. So is there anything concrete coming out of there? And what value in these kinds of alternative strategy brings to the company?
So you are right. I think in the last 1 or 2 calls, I mentioned about -- we have plans to enter into alternatives. And in the next financial year, you will see us launching a product on the category 2 side. We have filed an application that maybe to -- for a permission to launch a category 3 fund. Over a period of time, we have ambition to build our presence on the alternative side as well, so that's very much on track. You would have heard about our plans to set up a wholly owned subsidiary in the GIFT City.
Got it look, sir. And any particular value you think that these strategies will bring to the table in terms of profitability, in terms of bringing more investors, et cetera?
I think these are early days. And as I said that we have ambition to put up the core platform over the next several years. But these are like too early, I would say, to talk about the exact numbers.
The next question is from the line of [ Kartik from Merial Asset Management ].
I just want to understand if you can give me a ballpark figure on the yield on NFOs versus your existing funds.
I think different products would have different numbers. In fact, I mean, it's all kind of -- you can see the direct TR of the funds of not only of us, but the industry. And can also look at the distributor plan versus the direct plan and I think you can definitely, I think, kind of, do the full scan.
The next question is from the line of Sahej Mittal from HDFC Securities.
Sir, my first question was around -- so I know you answered that, but actually, to better understand, so it's given that the new NFOs are coming at very distributable commission. So what is our strategy going forward? Like could we see some reversion over there by increasing or how do we go about it? And the second was around if you could indicate some ballpark numbers as how -- what's the proportion of back book in our current AUM, current quarter average AUM that we decide to better understand what could be the pressure on the yield in the foreseeable future? And the third was around -- are there any one-offs in the other income, given that we have seen some good returns on a sequential basis. So, yes, these are the different questions?
So again, on the NFO side, on the core categories, we only had 1 fund category left that was multi-cap, the NFO that we did a few weeks back. And last year, in December, we had dividend deal fund. Now, our core categories are like almost full. There are few products that we have launched to fill our product gap on the international fund side, on the passive side. Thematic is one area where we have done BFSI fund. We have a few more funds in the pipeline. But overall, as I think we have been saying that our intention would be to grow as much, if not more in our existing funds. I think the performance has been looking up. We have one of the best-in-class product range across all categories. We have one of the best product lineup on the hybrid and solutions side, where we believe there is tremendous potential for us to grow. Some of the other categories, for example, focused equity, which is like very small for us relative to the size of that category, and Roshni will be managing that fund and as a brilliant track record over the last decade or so. And its tremendous scope for us to grow large and mid-cap is another category which [ Gopal ] is managing and there is a huge scope for us to grow in that and on the balance advantage or variety of other products where we have a lot of potential. So while I talked about the overall margin pressure, because over the last few months, I think financial year till date, out of [ INR 1 lakh 70-odd-thousand crores ] of equity flows, I mean, 40% or so have come through the NFOs. But I would assume that over a period of time, incrementally, higher amount of flows would be into the existing funds and the money which is raised in the NFOs. And within the NFO also, we are hoping for, I would say, more better pricing going ahead. Does that answer your question?
Sir, but my question was around, can we see some mean reversion in the distributor commission given that these are at elevated levels? So is there a possibility of that?
I think as I told you earlier that I think distributors also understand that to high payout in an NFO means much lower TER of the direct plan. And similar on a lighter note but I would say, on a serious note, as well mentioned, when somebody asked a question on the TER of the passive fund that some of the actively managed funds, TER is lower than even the passive fund. And you have to invest heavily, as an organization, to deliver alpha over a long period of time. And I'm sure, investors and distributors would understand that the fund houses will have to be well-compensated for them for that. So I guess, I think we have seen these periods earlier, and I'm sure, over a bit of time, we will see the mean reversion.
Got it. And the other bit was around what the percentage of our AUM would constitute back book on the equity side?
What percentage?
We can't give that, Sahej. So we don't give breakout. So we just give the quarter...
[indiscernible] to understand for next 3 or 4 quarters or we could do some calculation to understand for how long this yield pressure can continue?
No. I think actually Navneet explain, right? The yield pressure can continue if the gross flows in the industry are substantial or material part of the outstanding AUM. So if that continues, so we can look at gross flow numbers because finally, gross flow and net flows, what gets added to the AUM is net flows, but what kind of reprice is the gross flow number. But we can't give that split.
[Operator Instructions] The next question is from the line of Abhishek Saraf from Jefferies India.
Yes. So many of my questions have been answered. I just wanted to understand some quality with colors, if you can give on our market share -- AUM market share, which has been sliding. And so If you can just give some understanding in terms of the end-to-end market share or the gross flow market share and net market share, where actually we are looking for. And also, sir, just one thing that we have also been trying to address this market share losses, and now, it's been almost around the 2 years that we took some active steps towards that. However, it appears that the results have still not fallen in line. So what, according to you, still needs to be done that we can start to vest back in market share, especially in the equity AUM?
Sure. So I mean, we have, in part, discussed this at length and they said we are aware of the reasons behind loss of market share. So let me spend some time on the AUM and net flow numbers category-wise. And I think, this should help in understanding how we go about analyzing market share and also, the action plan at our end for the way forward. And this process, I might tell you too many numbers and so do pardon me for that. So let me start with some of the categories which have grown and have become quite large, where our market share in these respective categories is something that we need to address. I think just a few minutes back, I talked about the focus funds, which are now like INR 95,000 crores, nearly 5.5% of the industry AUM and our fund is less than INR 11,000 crores or so. So we are like 0.5% of our equity-oriented AUM. And we have catch-up to do there. Roshni is going to manage this fund now. She was managing Templeton focus fund which is among the best-performing fund in the category. Our team is working on doing a relaunch of this fund, clear communication of our strategy and back it up with the information and the distribution which is required. So we hope to grow our share in this category. I'll just give you 2 or 3 examples, so you can understand the things that we are doing at our end. We have also spoken about our miss door by design on sectoral and thematic space. We strongly believe that market wasn't ready and more often than not, risk is something that does not get enough due. But sectoral and thematic funds are now finding some space in our investors' portfolio. The AUM for the industry here is INR 1.47 lakh crores. I mean, as against, let's say, the INR 84,000-odd crores as of December '20, largest contributor to this growth has been technology fund. And then, we would like to believe that this has more to do with the recent performance than anything else. And our AUM in this entire space, I mean, the sectoral thematic space is INR 4,000 crores. In fact, within that, the INR 2,200 crores came when we launched the banking and financial services fund. We have filed or in the process of filing a couple of documents in this space with the regulator, and we'll be launching these funds over the next few quarters. Again, I mean, I think you were at the cost of repeating which we have been saying over the last several calls that we will launch only those funds, which we think have long-term potential and are good investments as of launch date and not something that is just because it's flavor of the season. HDFC AMC has never done that, and we would like to be very, very conscious off of that fact. Another category, for example, is large and mid-cap fund. I think we are at INR 5,000-odd crores but our market share is shade under 5%. I think our performance is strong and we'll be able to build on it. Multi-asset allocation fund or for that matter, the entire hybrid and solution bouquet that I talked about. We have one of the best-in-class, I would say, product bouquet with the long-term performance track record in that category and there is tremendous opportunity there. So whether it be large cap, flexi cap, mid-cap, small cap, we are looking at each and every category wherever there is go for us to grow and won't leave any stone unturned. Earlier, I talked about some of the other categories where there are more product launches likely to happen, for example, on the international fund side, on the fund of fund side, et cetera. And I'm not talking about passive here. We are talking about active funds, because I think the market share loss is something that you asked about. In fact, one of the largest category to see flows has been dynamic asset allocation category or what's known as balanced advantage. It's seen INR 50,000 crores plus net flows in these 9 months and INR 20,000 crores of that has been through NFO. We have a top-tier performance across time periods, 1 year, 2 year, 3 years, 4, 5, even longer in the category. In fact, over a 25-year period, I think it's one of the best-performing fund in mutual fund industry in India. And I would request you to check out numbers for yourself. And in our opinion, I think our thought process, our style for this category, if there is some misunderstanding in the way people bucket us, I think we would like to address those, so better times ahead. We have seen, I think, flows in flexi cap and multi-cap categories because of some of the larger NFOs. We have reasonable share in these flows because of our recently launched multi-cap fund, but still, there is a huge scope for us to grow there. I mean, I can go on. So we are on the bond. As you would appreciate, these things don't change overnight. I mean, I would like to mention that we are doing everything possible and hopefully, should see results sooner than later, whether things on client services side, whether on increasing engagement with our distributors across all channels, engaging them through NFOs, which also helps us. I mean, in our multi-cap NFO, we saw participation of over 13,000 distributors. Whether it's the communication, more segmented, more targeted, whether enhancing our digital platform, our customer analytics, providing both and investors as well as our distributors newer modes of transacting with us. So I think, we are on the bond and hopefully, that you should see the results, as I said earlier, sooner than later, including like a couple of other things that we are saying. But lastly, I would like to add one thing that, as an organization, we would always want to balance between market share and margins, because we do not necessarily subscribe to the idea of doing business at any price. We are of the opinion that market share, at any margin, might not be the best idea. People respect us for that balancing over the last several years. And we would also like to believe that getting share at any price is not a sustainable strategy. And hoping that industry will see rationalization at industry levels sooner than later.
Thanks, Navneet. It is very comprehensive response to that. Just one follow-up. So does this imply that as you mentioned that in many funds, our market shares are low in many categories. So we would be continuing with the more NFOs would be expected in thematic and other kind of -- sectoral kind of funds. And so that would be a right assessment, right? And secondly, you had mentioned that recently, the NFO pricing has been more favorable towards the manufacturers. So can you just give some color on, means, what was the earlier next year, which was accruing to the mutual funds? And what would have been the recent experience?
The pricing is not favorable to the manufacturers. But I mean, on the other point on the NFOs, I mean, as I told you earlier that on the core categories, we are like almost, we have presence across all categories. After the CB classification where, I mean, the categorization of funds, we have presence in almost every category. There are 4 categories: thematic funds, thematic or sector funds, international funds, passive funds, and fund of funds. These are the 4 where, I think, we have some more work to do in terms of filling our product booking. But otherwise, on the core categories, our focus would be on enhancing market share that we deserve in each one of those categories.
Next question is from the line of Prayesh Jain from Motilal Oswal.
Just a couple of more questions. So when you say that the gross -- the gross flow in the overall AUM increases, basically, we're talking about legacy assets versus new assets. Any sense on HDFC AMC's mix between, say, the pre-TER non-changed -- in the last couple of years, how this has changed?
So pre-TER, you are saying what was the AUM before on, say, 1st of April 2019, that way?
Yes. So basically, the mix, how that changes from the legacy, say, in FY '20, what was the AUM on the pre-TER and today, what is the share of that?
So we don't have that in sense because -- So what he's saying is what money would have gone out and what would have come in. We don't have that breakup.
Okay. Okay. Yes, because that would be the impact that you would be talking about, right? When the new flows come in, which are at much lower yield, not just the NFO but even in the existing schemes, when the older AUMs are going out of the system and the new AUM is coming in the new scheme as well, that would also cause the impact, right?
Yes. So that's what we've been talking about in many quarters. I mean, each quarter, we kind of mentioned this, and it's a continuous process which is going on. And that is one of the main factors which we are leading to this valuation in margin.
Okay, okay. And secondly, any color on what kind of yields these alternate assets can make the schemes that you're planning to launch and on a gross basis and as well as on the net base?
So alternatives are like a vast space. I mean, the way you think of like, let's say, somebody asked what kind of yield on a hedge fund, but there is an alternative strategy or there is another alternative strategy, would be difficult to give any number at this stage. It depends on what kind of product segment, what kind of investor segment that we target over a bit of time. So you will hear more from us maybe a few quarters down the line in terms of what we are doing in that space.
The next question is from the line of Hiral Desai from Anived Portfolio Managers.
Just had one question. So to your comment when you said that HDFC would always want to balance market share and profitability. So as investors, what is the one metric we would sort of look at for this to sort of play out so? Should we look at the operating margin? And is there a threshold below which you guys don't want to go? And let's assume that pricing remains irrational for a while, because sort of how do you guys think about it?
I think as I mentioned, a balance between the 2. I think over the last 21 years in this organization, what we have always tried to balance is scale, that's important for us. Quality, that's important for us, and in the quality of AUM, the quality of business that we do and profitability. And ensuring that we have a balance in all of these, not chasing scale at the cost of profitability, at the same time not missing on opportunities, which could, from a strategic perspective, could be important for us to be presenting. I mean, I mentioned earlier that we would like to remain a dominant player in active equity, active fixed income, active money market. But we would also like to have a relevant market share on the passive side because there would be a segment of investors who are looking at those kind of products, and we have to have a one-stop shop to provide all solutions to our investors. So I think we'll do a good balancing among all of them.
No. Probably, I appreciate that. So as investors, just wanted to know, is there a quantifiable outcome that we can focus on. So I appreciate a sort of the way you guys are approaching it. But as an investor, can we do it in a subjective statement. So I just wanted to get some thoughts on that. So like -- Is there a focus on a threshold OPM number? Is there a threshold on maybe, the profit number? So just wanted to get thoughts on that. Is there a quantifiable outcome that we can track?
This is also the market structure as it evolves, right? A few years back, that would have been a different number because passive didn't exist. A few years later, it could be different because we'll also have the alternative at our end, right? So it also has to be seen in the context of where the asset management industry is and where it has been and where it will be. All we are trying to ensure is that we have a scale in the business. We are a dominant player wherever there is an opportunity in the asset management side. Want to be a one-stop shop to cater to all investors, whether they are institutional investors or the individual investors to ensure that we have a share across product categories to ensure that we have fair share across channels of distribution. And tomorrow, there are other alternative channels like fintech that we talked about some time back or there are other channels to be present there. At the same time, ensuring that we have best-in-class profitability. I think that's how I would like to put in.
Got it. And the other question was on a 9-month basis, since you don't want to quantify the impact that NFO flows are having on the yield overall, can you just give us some sense on -- so on a 9-month basis, what is the kind of impact that some of these flows would have on the yield? So would it be like a half a basis, 1 basis point kind of impact on the yield? Just the noise because of NFOs.
So I think just to clarify, I think it's -- we gave NFOs as an example, but it's also the existing book versus the new flows. And within the new flows, again, margins are different in NFOs versus the money that is coming into the existing fund. The fresh flows into existing funds come at a lower margin than what we are running on the book. And of course, NFOs are the ones where the pricing pressure is more intense, or the competitive pressure is more intense. So execution of gross flows, net flows within the gross flows, existing funds versus the new funds or within the existing funds also, different products will have different kind of profitability. So it's a mix of all of those things. Just to clarify, it's not only pure NFOs.
The next question is from the line of Kaushik Agarwal from Haitong Securities.
Yes. Sir, there are 2 questions that I wanted to ask. Sir, first is around the PMS AUM, we have seen a decline on a quarter-on-quarter basis. So just wanted to know the reason for the same and how is the top line for the company during the quarter has been impacted? That's number one. And number two, I wanted to understand, like excluding NFO, like what would be the component of NFO in our total expense? So I just wanted to understand, on a sustainable basis, what would be the quarterly run rate for the operating expenses for the company?
So on the PMS side, while large client book profits and that's reflecting in the BMS AUM. And on the other side, I mean, it's not that we really -- and we don't give that number in terms of the breakup of our flows, NFO versus the other flows.
Okay. Sir, just one follow-up...
You're asking about for flow, right? You are asking about, Kaushik, the cost part of it associated with NFOs, right?
Yes, yes, yes. Yes, sir.
Sorry, I misunderstood it. On the NFOs, basically on the business development cost. So the further breakup of the operating expenses is not there. But yes, it would be a couple of crores, yes.
Understood, sir. And sir, just one last question on around this outlook regarding this PMS AUM. How do you see this book growing in medium to long-term perspective?
So just to add on your earlier question in terms of expenses, if you look at the difference between the 2 -- the trailing quarter, that would be the incremental cost in NFOs and some degree of business development. So we don't really give exact numbers, but that will give you a fair idea.
Understood. Understood.
Yes, sorry. What was your second question? We didn't get that.
Sir, just a follow-up on this PMS AUM, your outlook over the period of time? How do you see this book growing for the company? And just wanted to understand what kind of yield are we making in this book?
I mean -- So again, as I mentioned about alternatives, I think that included revising our PMS business as well, and you'll hear more on that front over the next few quarters, what we are doing on the PMS. So when I talked about the alternative, earlier, I mentioned about category 2 and category 3 funds, but that also includes what we do on the segregated accounts or the overall PMS, yes.
The next question is from the line of Madhukar Ladha from Elara Capital Plc.
Looking at the AUM, the average AUM is up about 5% 2Q, while the AUM is up only about 1.2%. I know that there was a mark-to-market impact in December, especially. What do you -- what should we read this more? Is it more because of performance? Or did we lose some further market share in flow because December was a very strong as active equity scores are concerned. So that's my first question. And the second question is on other income, this again is there any one-off? So that'll be helpful.
So I'll answer the other income first and then Navneet can take the other one. So on the other income, you know that we've got a pretty large book of investments in our own debt mutual funds, and the interest rates have varied. So part of it is that. And part of it is, like you said, the one-offs that we have. So last year, we had some one-offs. And this year also -- this quarter also, there is some one-off because we have also got investments in other things besides this. So there's some MTM gain there. So I wouldn't take the number that we have this quarter as something which can be factored in every quarter. So there is no one-off there.
Can we quantify the one-off element?
I don't think we want to do that. But if you look at the trailing quarter, then you'd probably get a good idea of where it should be, given where interest rates were at that point in time.
And the other question on the market share. So you're right. I think you can see in the investor presentation, market share has come down. And it's a combination of a few things, including, maybe, a slightly lower share in the inflows. The gross flows that I talked about earlier, that would have come to us relative to the market share we have overall in the equity segment. But I mean, I've given the, I would say, comprehensive answer in terms of the categories where we have the potential to grow and some of the other things that we are doing as an organization to stem the fall in the market share.
Right. Sir, anything more that you're doing on the performance side.
I think performance, as I mentioned earlier, that if you look at the last 1, 2 years, I think as the rally has become broad-based when the markets were extremely polarized, and we had a certain view on the economy and markets versus, I think, the way markets have played out over the last 1 or 2 years, our performance has improved very, very [Technical Difficulty] portfolio, adjust that we had, as I said, we had a certain view on the economy and sectors. Finally, it has played out that way. And in the very long run, I think we have another best performance track record. There's still -- maybe if you look at 3, 5 years, I think it started improving and you will see that -- I mean, the improvement in performance over the last 1, 2 years in a couple of categories will start reflecting in the 3, 5 years as well. While the longer-term performance, I think has been absolutely -- when I say longer term is, I'm talking about like 20, 25 years, has been absolutely best-in-class. So I think, yes, I mean, it's in the -- we feel very confident that more and more investors, more and more distributors, all our partners would start noticing it. And hopefully, sooner than later, we will see that reflecting in the flows as well.
The next question is from the line of Abhishek Saraf from Jefferies India.
My question was answered. Thank you.
Ladies and gentlemen, due to time constraint, we will take the last question. The next question is from the line of [ Devesh ] Individual Investor.
Just a quick question, Navneet, from comments you made that our performance has been visible in terms of improvement trajectory compared to previous. So in a quick research as you were talking, and I took HDFC balance advantage fund, and I could see that many of the platforms we have rated as single star, compared to other competition, which is on all time frame, lesser returns on TER, better than us, still we are rated at single stars. I know these are external properties and assets. But do you have a team who sort of tracks this report set to sort of communicate to market? How do we sort of work around this?
No, absolutely. I mean, while, of course, the best part of our industry is that it's extremely transparent. You get the daily [indiscernible]. And there is a tremendous, I would say, media scrutiny. There is tremendous scrutiny from lots of analysts across the board, and we get all of these rankings, ratings, and in the commentaries from various experts, I think at our end, whether it's the investment team, our product team, everybody keeps a very, very close track of that. And over a period of time, as I told you that the improvement in the performance that we have witnessed, and you talked about the balanced advantage fund. And I would request you to look at this. I mean, to check out the numbers for yourselves. Across all time periods, 1, 2, 3, 4, 5 or even longer, I think it's appearing right at the top. That's a category which has got the highest amount of positive flows. And at our end, also, we are hopeful that as the performance gets noticed, and this fund has one of the longest track record in the industry as well. So I think as the investors and distributors notice that improvement in performance, I'm sure it should reflect inflows as well.
Sir, in terms of rating, what you mentioned, this generally happens with a lag. So hopefully, those 1 and 2 stars should start going up in case of balance advantage.
Right. And just as a follow-up, I mean, do we have a sort of communication with these platforms, or we deal with to them for sort of reflect those changes on their own time lags? The reason I'm asking is direct to retail advisers, they sort of research and probably get misguided by just looking at ratings and things like that.
Exactly. You're absolutely right. So 2 things. One is that, of course, I think these are independent agencies. We usually respect them, their objective. And of course, one can argue with the different -- how do I put it? I think it's a different methodology. But over a period of time, I think all of them have, I would say, the investors' attention on those ratings. But on the second part is, I think the job, at our end, is to go and explain our investment side, our investment philosophy, our investment process, and the way teams has been managing these funds, that there are cycles in market, there are cycles. I think when one style of investing performs better versus the other time periods. And how should one investor or a distributor or an adviser should look at those funds across times -- I mean, across market cycles is a job at our end. And that's what, I mean, our product team, along with our investment team, along with our marketing team, that's a job at our end. But we respect all the rating agencies who give an independent and objective rating. As you rightly said, I mean, investors look at that. Our job is to ensure that investors just don't look at what happened in the recent past, but I think a more longer-term track record as well as the philosophy with which these funds have been managed.
Thank you very much. I now hand the conference over to Mr. Navneet Munot for closing comments.
Thank you for attending this call, and I wish you all good health and a great year ahead.
Thank you very much. On behalf of HDFC Asset Management Company Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.