Kochi- based Hedge Equities Ltd was established in 2008 when global financial crisis had already started to make impact across markets. It began as a securities trading firm and the crisis was a learning phase. But the disruption caused by discount broking firms such as technology-driven Zerodha in 2010-11 compelled Hedge to look for other options. It zeroed in on wealth management with a small team of five. It now provides bulk of the income and sustainability for this financial services company. It also had roped in leading super star of Mollywood, Mohanlal as its Brand Ambassador at the launch of the broking services.
Alex K Babu,37, Managing Director of Hedge Equities in a chat with Sreekumar Raghavan of Corporate Ethos shares his views on the recent boom in Indian equities, importance of wealth management and regulatory issues:
# Worldwide stock markets are going through a boom phase and our own Sensex and Nifty have hit record highs. How do you analyse the present cycle and how different it is from previous ones?
I have analysed four previous cycles and there is a distinct difference this time. Now investments are not driven by foreign portfolio investors but by domestic investors through Systematic Investment Plans (SIP). The success of SIP investments happens when the investor puts his money for the maximum tenure and fund size he is comfortable with. In such cases, irrespective of the market cycles, investors will get excellent returns as they are not glued to daily movements. In SIP, you should enter the market at the high point and go down to the lower level, complete the cycle in order to get the benefits of rupee cost averaging.
In earlier cycles, investors were directly buying into equities as mutual funds were not mature enough. In the last cycle, investors were rushing into unit linked insurance plans or starting a trading account. In this cycle people are putting their money in balanced funds- debt and equity. The size of Rs 6000 cr SIP shows that funds managers or advisors are doing their job well.
In this cycle, we are unleashing the power of domestic savings. You must understand that listed stocks represent only 40% of the GDP of India. So action is happening in a basket of stocks which become overvalued beyond limits and it could be a bubble that can burst. Ideally, more IPOs should happen in electricity, energy, infrastructure, road building can lead to better allocation of investor money across sectors decreasing the likelihood of a bubble.
#How do you explain the increased domestic investor interest in equities?
The stock markets are at an inflexion point triggered by demonetisation. With this one surgical strike, the conventional investments such as real estate, gold and bank deposits were hit. Banks were flush with funds and they reduced the Fixed Deposit rates. So people had to look at equities These trends are here to stay and it won’t change today or tomorrow.
#You were a late entrant in financial services in Kerala where there were already established players. How could you survive the various crises that hit the market?
Since 2008, the market has seen volatily and we faced it. But the most disruptive development happened in 2010-11 with the arrival of players such as Zerodha who offered discounts based on the strength of their technology. Investors just had to pay Rs 10 or 20 per trade. It broke the conventional broking business based on large number of branches and staff.
This compelled us to start wealth management business with a team of 5 members that now has assets under management (AUM) of Rs 650 cr managed by a team of 25. We have 50000 clients for our broking business but it is evaluated on broking income and assets under custody. Then we have the non-banking finance company (NBFC) which gives loans against shares and securities. Now we are quite justified in our decision to shift focus from stock broking to wealth management. Now people don’t go to brokerages to start a trading account except for some youngsters who may prefer Zerodha.
#Is Wealth Management and Portfolio Management Services (PMS) the same?
In India both are different while in other countries all sorts of investments can be done under PMS. In our country, SEBI rules allow only 100% equity investments through PMS. PMS and Wealth Management are based on risk appetite and profile of an individual. If you are willing to take high risk and get higher returns, then PMS is for you. In wealth management we look at the age, risk profile, returns expected and then advise on the assets where they can park their funds.
#Why is it that investors are still shying away from stock markets despite the boom and stories of people becoming billionaires through stocks?
Stock market has to go through three steps to convince an investor to trade. First is awareness, second is building credibility and third is performance. We are still in the first level – creating awareness as in Kerala and in other metro or commercial cities they have reached the third stage where they have performed too.
In Wealth Management, equity is only one option for investment, we may give suggestions for Gold ETFs. Health and Term Insurance, mutual funds, Real Estate or any other asset. The point is not to put all your eggs in one basket but diversify your assets based on your risk profile. We recommend equity PMS only for high, risk high return investors. We may soon reach a stage where all kinds of advisories will be charged. We also take care not to mix insurance with investment.
There is an Israeli investment principle-25% investment each in equity, gold, real estate and debt can give risk free returns. However, we can choose to have a different mix of assets based on our requirements and risk profile.
# Electronic trading in Commodity futures or derivatives was launched with much fanfare in 2003 but allegations of speculation, manipulation and scams rattled the market in the first decade. How do you analyse the current situation?
We were not a major player in commodities right from inception as we found the system to be opaque and no connect with the spot markets. After the Rs 5600 cr NSEL scam and speculative trading, lot of controls are now in place after SEBI was made the regulatory authority. In the first 15 years, it only opened up and the market was not mass based being managed by a few big players. Now things are changing , I am looking forward to trading in commodities and also willing to include it in our wealth management.
#How do you visualize the future for Hedge?
I am not yet talking of any growth figures now. We are in Kerala where equity investing culture has to grow and as I said earlier we are in the process of creating awareness and building credibility on the wealth management platform. Once the investors see good performance from us then we can think of quoting some growth figures. Then there will be room for 100 more players like us as there will be more money with people who are willing to invest.