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In conversation with Nilesh Shah, Managing Director of Kotak Asset Management Company. Thank you so much for joining me. I’m going to pick something really broad, the future of mutual funds, but let me start with a question that’s a little more specific: do you feel that the mutual fund as we know it today needs to be reinvented?
Undoubtedly, yes, Govind. Today, the mutual fund model is right, but we need to reinvent it.
Mutual funds are not just equity. I’ve met people who say, “I’m doing an SIP, but I don’t invest in mutual funds.” We need to expand mutual funds from equity alone to debt, hybrid, alternatives, and many other asset classes, so that we can bring investors with different risk-return profiles into mutual funds.
Is that a result of what we’ve been seeing in the market recently, since it hasn’t really gone anywhere in the last two years or so? Or is it more strategic?
I think it’s partly driven by what has happened in the last two years, but more importantly, today I have 6 crore customers. There are 40 crore people who have the means to invest. Potentially, I have 34 crore more investors to bring in.
How do I bring them in? If I continue to sell SIPs and equity mutual funds, 6 crore will become 10 crore, but not 40 crore. But if I can create SIFs, REITs, and offer global investment options, that will help me go from 6 to 40 much faster.
So what does the process of evolution look like here? Some of what you’re talking about, REITs, for example, already exist, but in a sort of parallel universe. You’re operating in another universe, which is of course the biggest of them all right now.
Do you see these worlds converging? Do you see one becoming a subset of the other?
I think they’ll have to converge, there’s no choic*e. Globally, we’ve seen sovereign funds and pension funds move from pure, direct, listed equity and listed debt and G-Secs into many other things. The risk-return profile of each is very different.
Why can’t we get into real estate, infrastructure financing, self-help-group-type work? It’s possible to create products with different risk-return profiles and earn reasonable returns for our investors. We started with debt and equity, which is good; then we moved into gold, fairly good; then from active to passive, again, good.
But we’ll have to keep going on this journey of innovation. For example, in India, about 125% of GDP is locked up in gold. What kind of product can mutual funds launch so that this gold can be monetised?
It would be a win-win for our customers, the country, and the industry. Gold ETFs were the first step in that direction, but we need to think about far more products.
So are you saying that, in some ways, equity has lost its attraction?
No, not at all. Equity is attractive, but it doesn’t appeal to everyone. Otherwise, I’d already have 40 crore investors.
Over the last 30 years, I’ve delivered returns of 15%-plus or 12%-plus, and yet there’s more money sitting idle in currency notes, earning no return at all. Why aren’t people rushing to invest that money with us? There’s a disconnect, and maybe the high-risk, high-return nature of equity needs to be replaced with something else as a first product.
Once an investor gets that initial experience, they’ll keep moving further.
At this point, I know there are some classes of investors who are clearly alert to what’s going on, usually ultra-high-net-worth or high-net-worth individuals. But do you feel other classes of investors are also now seeking this change, or seeking more broad-based investment opportunities?
Smart investors will figure out what they need to do. There are less experienced investors who will need to be educated. So it’s a push and pull together, and this is where mutual fund distributors play an important role.
Whatever we convey to them, from a market perspective, from a portfolio-allocation perspective, they can amplify to their investors.
I’ll come to the supply side in a moment, but tell us a little about the regulatory architecture needed for doing all of this, or for moving in the direction you’re talking about.
The regulator has been very helpful and very encouraging. Many of the regulations are shaped through co-creation, via the Mutual Fund Advisory Committee or interactions with the mutual fund association, AMFI. And, of course, as a regulator, they have to build in safeguards to ensure retail investors can trust the system.
But this is one of the best regulatory architectures we have — very open, always co-creating regulation — and I think we’ll continue working with them to create more innovation.
If you were to take a specific example, since you touched on real estate and alternatives, what would a fund you’d like to envision look like? Let’s say, six months from now, assuming you could offer that product.
One product I’d have loved to launch is a gold fund that buys options, a principal-protected gold participation fund. The options would give upside exposure to gold without the downside, and the cost of the gold option would be, say, 5%, 7%, 10%, whatever the market dictates.
The balance I can invest in fixed income, creating a pool that works for the manufacturer, the distributor, and still gives something to the investor. Imagine the appeal: if gold prices go down, you get your principal back, plus something more. If gold prices go up, you get your principal, plus the gold’s appreciation, plus something more. That’s one way to bring investors into the mutual fund fold.
And you say gold because it has more universal appeal. Okay. You also mentioned real estate and alternatives, tell us what those products could look like.
So many people have invested in real estate and put it on rent. But the next generation often isn’t in the same city, or even the same country. How are they going to manage that property?
Now, do people need exposure to real estate as part of their portfolio? The answer is yes. So can we create products similar to REITs and InvITs, where a customer benefits from the expertise of a mutual fund manager who manages a real estate portfolio, office premises, hotels, shopping malls, and other such assets?
I foresee a scenario, over time, where most retail investors let go of their individual properties and move into REITs and InvITs, so that wealth can be passed on to the next generation with much less trouble.
This is already happening in a small way, since we have both a listed universe and an unlisted one, where mostly savvier investors participate. To bring this to retail investors, you’d need to go to SEBI and make the case. What does that process look like?
First, we need the talent to manage that. Second, we’re venturing into securities that are mostly illiquid, so the fund has to be close-ended, or at best interval-based.
We’ll also need to popularise loans against mutual funds, because when a fund is illiquid, a loan against it is a good way to provide interim liquidity, albeit at a cost. Finally, once we have the complete package, we can go to the regulator and say: here are the changes we need, here are the risks, and here’s how we plan to manage them and hopefully, this is a product you consider appropriate for retail investors.
Are you also considering products in areas like venture investing or private equity, which carry a higher risk profile?
Yes, that’s a very attractive option. We can bring retail investors into the unlisted market, and most importantly, offer them diversification. Today, you can join an angel network and invest directly, but you’re unlikely to get the diversification that a mutual fund can provide.
So undoubtedly, these are the kinds of products that will further expand the mutual fund industry’s investor base.
So, where we are today, right now in the middle of 2026, how fast do you think we need to move in expanding this, to go back to “equity is not right”?
Equity is right, but mutual funds are not just equity. Ideally, we should have done this yesterday. But the real challenge lies in talent, how do I find people who know how to manage these portfolios and their risks? Talent remains the constraint. Once the talent pipeline is available, I think we’ll see more product launches.
When you say talent, if a fund is investing in, say, real estate, metals, and ventures together, do you need three different specialists for that? Or could one person handle all of it?
For allocation, that talent is available. But we also need specialists to manage individual segments. For example, SIFs were permitted in February 2025. We launched our product in July 2026, because we didn’t have the talent earlier and without talent, how can I launch a product?
And others have also launched SIFs. So what’s the experience been so far?
So far, so good. The industry has managed the SIF transition quite well. People have used the depth of derivatives markets to create risk-return profiles that offer absolute or uncorrelated returns.
In simple terms, an SIF should deliver positive returns not necessarily daily, but over a reasonable period.
You’ve talked about the supply side. How do you see demand right now? I know incremental mutual fund investments have been fairly steady, even if they fluctuate month to month. What’s your outlook going forward?
My sense is that investors today are far more mature than people give them credit for. Mutual fund distributors have done a good job educating investors and supporting them through ups and downs. Word of mouth also plays a role, since many people have gone through a roller-coaster ride and still made money.
Put together, there’s a track record, a support system, and confidence about the future. I expect the mutual fund industry to keep growing. In terms of net sales, we should see low double-digit growth. In terms of overall AUM growth, we should be looking at high single digits to low double digits.
And that’s a fairly standard rate of growth you’re describing. Coming back to the demand side, there are sophisticated investors and smaller retail investors, as we discussed earlier. Many investors rely on distributors, whose advice they treat as gold. Do you think investors need to change how they invest, or whose advice they rely on?
I think a smart investor is one who optimises risk and return, while a less experienced investor is one who believes in luck, ignores risk, and jumps into whatever opportunity comes along. You need a hand-holder to strike a balance between greed and fear.
I’ve seen experienced people become greedy or fearful at exactly the wrong time which is why a second opinion always matters. Stick with what has worked for you, but remain open to correcting your mistakes.
Do you think investors should keep going to mutual fund advisors, or go back to them? I know it’s a long-running debate, many people have shifted toward self-advice or self-directed analysis. What’s your sense, having observed this for a while now?
My observation is that investors supported by mutual fund distributors show far greater longevity and persistence than do-it-yourself investors. DIY investors tend to be momentum chasers, and momentum rarely delivers better returns over time.
Distributor-supported investors, on the other hand, stay invested through the ups and downs, and that persistence delivers better returns. My impression is that distributor-supported portfolios have outperformed do-it-yourself portfolios by a meaningful margin.
Interesting. Perhaps because, when markets aren’t looking good, a call to the distributor does more counselling than anything else, and that helps investors hold on as opposed to reacting quickly through a broking app.
Exactly, convenience can sometimes create confusion. You’re able to move so quickly in today’s do-it-yourself environment that you end up making mistakes. With a distributor, at least someone is able to caution you against greed and support you against fear, and that equilibrium is better maintained through that second opinion.
For those listening, what two or three questions should I ask my distributor before deciding where to put my money?
First: is my portfolio helping me achieve my objective? Second: is this portfolio appropriate for my risk appetite, am I taking too much risk, or too little? Those are the two questions to ask.
Invest based on your risk profile, don’t take on more risk than you can handle, or you’ll become fearful. At the same time, if the portfolio isn’t helping you achieve your goal, why are you holding it? How many investors have actually shared their goals with their distributor? It’s a relationship, not a transaction. As long as the portfolio helps you achieve financial freedom within a risk level acceptable to you, you’re on the right track.
Interesting. Let’s turn to where we are today in terms of the markets. We’ve had a good first quarter, with most companies performing better than expected. Q2 also looks to be on a similar track, and yet the markets haven’t quite responded. Why is that, and what’s your outlook for the next few months?
We remain positive on equities and the market. The muted response is probably due to the large supply of IPOs, a big pipeline is lined up, and that’s absorbing appetite.
But the rupee has been stable, thanks to the resounding success of the FCNR(B) scheme. The monsoon, which was well below the long-term average, is now catching up, still deficient, but not as badly. FPI selling is turning into incremental buying, and most importantly, valuations and earnings fundamentals are now far more balanced compared to September ’24. So sentiment is turning positive, flows are turning positive, and fundamentals are improving. Put together, can the equity market deliver good returns going forward? The answer is yes. But the key question is: what counts as a “good” return? I think it’s still high single digits to low double digits, not the 20–30% some people are expecting.
Oil prices seem to have influenced market movement over the past year or so, especially since March, given the ongoing conflict. Do you sense that markets have now distanced themselves somewhat from that, or are we still just as tied to it?
We’re still very much tied to oil, but oil prices themselves have become less volatile. Earlier, every statement from Trump or news from Iran would move oil prices. Now it’s become a bit of a “boy who cried wolf” situation, the tiger isn’t showing up, so the market has grown comfortable. We’re still tied to oil, but its lower volatility is being reflected in the equity market.
What other macro or micro signals have you been watching in the last few months, ones that give you either encouragement or cause for concern?
One source of real encouragement is how deep-tech manufacturing is emerging. We’re seeing many entrepreneurs — both in our existing portfolio and in the IPO market — who are globally competitive. One big shift is that, thanks to artificial intelligence, the knowledge gap in research and innovation is shrinking rapidly.
We’ve invested in a company aiming to build something that globally only two or three players currently make, and when I asked how they’d acquire that knowledge, the founder said 70–80% of it would come from AI. What used to be proprietary knowledge locked inside a company’s research lab is now available in the AI-powered world, with the remaining 20–30% worked out independently. This commitment to deep-tech manufacturing excellence, with the world as the stage, is very encouraging.
What worries me is whether we’ll take the tough decisions needed for reform, land reform, labour reform, and addressing constraints in deep technology. That’s something we’ll need to keep in mind.
When you say land and labour reform, you mean making things faster and simpler? Yes. Land reform means being able to acquire land faster, at a reasonable price. Labour reform means being able to employ people without worrying that they’ll become a liability if the business runs into trouble. Today, there are workarounds for both, contract labour, for instance, has replaced some of the flexibility to hire and fire but those workarounds are ultimately band-aids. What we need is real reform: improving ease of doing business through land reform, labour reform, and simplifying compliance rules and regulations. That will create more sustainable growth. We’re currently at a five-to-seven percent growth trajectory; we now need to aspire to double digits.
Coming back to where we started, you said the time has come to reinvent mutual funds. If you connect that to the opportunities you’re seeing versus the demand and flow of capital, where should we place the greatest emphasis? And is there a chicken-and-egg problem here?
I think the greatest emphasis should be on letting the market lead. Market forces will make mistakes, but they’ll also self-correct, and ultimately they’re the best allocator of capital.
Rather than government or regulators directing capital into fixed income, equity, SME, venture capital, or alternatives, we should let market forces decide, based on risk and return. As long as it’s done transparently, as long as innovation is encouraged and wrongdoing is punished, I believe the market is the best allocator of capital.
That’s a good note to end on. Thank you so much for joining me.
Thank you.
