On Episode 973 of The Core Report, financial journalist Govindraj Ethiraj talks to Nilesh Shah, Managing Director at Kotak Mahindra Asset Management Co. Ltd in an excerpt from our recent Special Edition.

SHOW NOTES

(00:00) Stories of the Day

(00:50) Why Is Crude Oil Not Over $100?

(04:04) Indian Banks May Not Have Hedged Future Interest Payments In $127 Billion NRI Deposit Flows

(07:24) Why Copper Prices Have Hit Fresh Highs

(08:20) India’s Operational Office REIT Portfolio Has Expanded By 74% Year-Over-Year In Last Six Months

(10:02) Mutual Funds Have To Be Reinvented, But What Comes Next?

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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.

Good morning, it's Wednesday, the 9th of September, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

Our top stories and themes…

Why is crude oil not over $100 a barrel?

Indian banks may not have hedged future interest payments in $127 billion NRI deposit flows.

Why copper prices have hit fresh highs?

India's Operational Office Real Estate Investment Trust or REIT portfolio has expanded 74% year over year in the last six months.

And mutual funds have to be reinvented. But what comes next?

Markets, NRI Deposits and Oil

The question everyone is asking is why crude oil is not above $100 a barrel and only nearabouts. That's as of right now.

And that's also, of course, meant to convey some relief on how things could be worse. But for markets and economies like India, near $100 is not good news either, even if the worst case forecasts have already factored it in. So one reason for this is because oil is flowing through.

Crude oil shipments from Middle East producers are at about 11 million barrels per day now from 18 million barrels before the war started about seven months ago. Reuters report quoting Argus said oil is also flowing through other routes apart from additional production from other regions in the world. Also, demand destruction in petrochemicals and transportation fuels remains significant in the third quarter at 3.5 million barrels per day versus about 4.5 million barrels in second quarter, with China accounting for more than half of that because of rising transport electrification and coal-based chemicals, according to Reistad, also quoted by Reuters.

China, which is called the new Demand OPEC or Organisation of Petroleum Exporting Countries for its market influence, has reduced seaborne crude shipments to about 7 million barrels per day in July and August from around 11 million barrels per day in February. That's before the after Saudi Arabia said operations at several energy facilities in its south were halted by attacks. And it's not just crude.

Global diesel supplies are straining further thanks to a lack of spare refining capacity, Russia's ban on exports and the approach of peak winter demand, according to Reuters report. Brent, by the way, is up about 60% now this year and Europe's diesel benchmark is close to $200 a barrel. So the wars in Ukraine and Iran have hit refineries in Russia, and the Middle East, pushing diesel margins to record levels in Europe and the US, while crude supplies to Asia have come down.

VTOL CEO Russell Hardy told the APEC conference on Tuesday that there's really a shortage of products because we're missing 2 million barrels a day from Russia and we're missing nearly 2 million barrels a day from the Middle East, according to that Reuters report. US diesel prices also hit record highs late last week. Now high fuel prices in the US do not seem to matter much, at least from a policy response or meaningful reaction, so we have to leave it there.

Back home, the markets are getting hit once again. The benchmark indices fell for the second session and ended at the lowest level since mid-June. The Sensex was down 555 points to 75,577 and the nifty 50 was down 144 points to 23,635.

In the broader markets, the nifty mid cap and small cap were up 0.2 and 0.17 percent. The rupee saw its sharpest fall since late July on Tuesday thanks to rising oil prices and fell to 94 rupees 81 paise per dollar by the end of Tuesday, down about 0.35 percent from its previous lows, according to Reuters. Broadly, continuous Reserve Bank of India interventions have helped take the rupee higher to a more than two-month peak last week, though that rise has met with resistance thanks to rising oil prices and still elevated hedging demand from local importers, according to a Reuters report, which also quoted unnamed bankers saying Indian banks have left much of their future interest payments on overseas forex deposits unhedged, creating a source of potential dollar demand that could compound depreciation pressure in a rupee weakening scenario.

Banks have raised more than $127 billion in such deposits from mostly NRIs, and it costs banks about 3% a year to hedge forex risk on interest payments for deposits of three- to five-year tenors, for which the interest is paid when the deposits mature rather than periodically, according to those bankers. One head of forex trading at a private sector bank told Reuters the cost of hedging is prohibitive, particularly given how recent Reserve Bank of India intervention has made risk-reward on the rupee asymmetrical. While the Reserve Bank of India's special swap facility does shield banks from forex risk on the deposits' principal amounts, interest payments need to be managed by lenders independently.

Foreign banks are largely hedging exposure, says that report, but most state-run banks and several private sector banks have not. The local banks are also betting that positive developments are more likely to trigger a larger rupee rally than negative news is to weigh on the local currency. Meanwhile, Reuters also reported that Reliance Industries is set to return to India's rupee bond market after nearly three years with what would be the single largest tranche of fundraising by a rated firm since November 23.

Reliance plans to raise about Rs 12,500 crore or about $1.3 billion through a sale of five-year notes at an annual coupon of 7.47% and could invite bids from investors in the week ending September 18, according to bankers who spoke to Reuters. A sharp decline in yields on up-to-five-year bonds has locally made such funding cheaper than dollar debt sales, according to bankers. We carried extracts of a conversation with economist and former whole-time member of the Securities and Exchange Board of India, Anant Narayan, where he argued that the Reserve Bank's aggressive intervention in the bond market, including record purchases of government bonds, has kept interest rates artificially low and weakened the appeal of fixed-income assets for domestic savers.

Meanwhile, the trade war has resumed in full force, at least in North America. Canada's retaliatory tariffs on several U.S. goods took effect on Tuesday after trade talks collapsed last month. The duties range from 15 to 50 percent across some $27 billion worth of U.S. products, including dairy, agricultural equipment, paper, household appliances, and electronics.

Canadian tariffs on U.S. steel, aluminium, and iron products doubled to 50 percent, and furniture and clothing were also hit at the highest rate, according to a CNBC report, which quoted Canada as saying the move would be a dollar-for-dollar response to U.S. tariffs on its own goods, which have been targeted by Section 338 tariffs. Elsewhere, if you felt Wall Street was overheated, then hear this report. U.S. stocks aren't as expensive as they look, according to an HSBC analyst quoted by Bloomberg, who said that valuations still fail to capture the scale of the AI-driven productivity and earnings boom.

The HSBC analyst said that price-to-earnings gap with Europe has narrowed and that multiples do not yet fully reflect what described as a structural investment cycle with AI. The S&P 500 trades at about 19 times forward earnings compared with a multiple of nearly 15 times for Europe's stocks 600. According to him, the U.S. is not expensive.

The markets are questioning the sustainability of earnings growth, but that's in the price because the gap has closed, he told Bloomberg. Copper has hit a record high for the second straight session, as tight near-term supplies and expectations that the United States will tariff imports of refined metal has pushed up according to Bloomberg. Copper rose for the fourth day on the London Metal Exchange, touching an all-time high of $14,617 a tonne.

Why copper prices have hit fresh highs?

Copper has already risen about 17% this year, thanks to a long-term mismatch between tight mine supply and growing demand from data centres, power grids, and renewable energy equipment, according to Bloomberg, which also pointed out that flows have drained stockpiles in London Metal Exchange warehouses, and there are also operational problems at several copper projects which are fuelling concerns over supply, with global mining production at risk of seeing its first annual decline since 2017, unless output recovers in the second half.

India's Operational Office REIT portfolio has expanded 74%

India's operational REIT or Real Estate Investment Trust portfolio has expanded by 74% year-on-year to 167 million square feet in the first half of 2026, from about 96 million square feet in the first half of 2025, according to a NasoCham Night Frank India report. REIT, as we said, is Real Estate Investment Trust, a company that owns, operates, or finances income-producing real estate and of course is a growing category of investing in India, mostly for institutional investors earlier but now spreading, thanks also to listed REITs.

Bangalore has the highest REIT penetration amongst the major office markets, with 67 million square feet of REIT-backed office stock accounting for 27% of Bangalore office inventory, according to that report, of which Embassy Office Park is the largest in Bangalore. Hyderabad comes next and Mumbai is third, just behind Hyderabad, with NCR and Pune, that's National Capital Region, and Pune coming after that. The report says that the sharp increase highlights the growing role of REITs and INVITs as vehicles to monetise, aggregate, and recycle capital across real estate and infrastructure-linked assets.

INVITs are called Infrastructure Investment Trusts and are similar to mutual funds, they pool money from investors to buy and operate, again, income-generating infrastructure projects now, like highways, power, transmission lines, and so on. India's operational REIT portfolio represents about 16% of India's office stock and the under-construction portfolio is equivalent to a further 19% of the existing operational REIT stock.

A Much Needed Reinvention for Mutual Funds

Mutual funds have had a tough time delivering good returns in the last two years, not surprisingly, of course, given the markets have been mostly flat.

After a multi-decade strong run, is it also time to ask if mutual funds need to be reinvented? I put that question to Nilesh Shah, Managing Director of Kotak Mahindra Asset Management, also a part-time member of the Prime Minister's Economic Advisory Council, and I asked him whether mutual funds needed reinvention and, of course, how.

INTERVIEW TRANSCRIPT

Govindraj Ethiraj: Nilesh, thank you so much for joining me. So I'm going to pick something really broad, which is the future of mutual funds. But let me ask a question which is a little more, let's say, specific, which is, do you feel that the mutual fund as we know it today needs to be reinvented?

Nilesh Shah: Undoubtedly, yes, Govind. Today, mutual funds are right. We need to reinvent.

Mutual funds are not just equity. I have met people who are saying that I am doing SIP, but I don't invest in mutual funds. We need to expand mutual funds from equity alone to debt, hybrid, alternate, and many other asset classes.

So we can bring different risk return profile investors to mutual funds.

Govindraj Ethiraj: And is that a result of what we are seeing in the market right now, because they've not gone anywhere as such in the last two years or so, or is it more strategic?

Nilesh Shah: I think partly it is 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 a vehicle.

Potentially 34 crore more investors I have to bring in. How do I bring them? If I continue to sell SIP and equity mutual funds, 6 will become 10, but not 40.

But if I can create SIF, I can create REIT, I can create global investment, maybe that will help me to go from 6 to 40 much faster.

Govindraj Ethiraj: So what's the process of evolution here? So some of what you're talking about, REIT for example, is there, but it's in a sort of parallel universe almost. Whereas you are in another universe, which is of course the biggest of them all right now.

So do you see these worlds converging? Do you see one becoming a subset of the other?

Nilesh Shah: I think we'll have to converge, there's no choice. Globally we have seen sovereign funds, pension funds, moving from pure direct listed equity and listed debt and GSEC into many other things. Risk return of each is very very different.

Why can't we go into real estate, infrastructure, financing, self-help group kind of work? See, it's possible to create different risk return profiles and earn reasonable return for our investors. We started with debt and equity, which is good, then we moved into gold, fairly good, then active to passive, again good.

But we'll have to keep on this journey of innovation. For example, in India, about 125% of GDP is locked in gold. What kind of product mutual fund can launch so that this gold can be monetised?

It will be win-win for our customer as well as for the country and industry. Gold ETF first step in that direction, but we need to think about far more products. So are you saying in some ways that equity has lost its attraction?

Not at all. Equity is attractive, but it is not appealing to everyone. Otherwise, I should have 40 crore investors.

I have delivered for the last 30 years 15% plus return or 12% plus return and there is more money lying in currency notes, which does not give any return. Why are people not rushing with their currency notes to invest with us? There is a disconnect and maybe the high risk, high return of equity needs to be replaced with something else as a first product.

Once he gets that experience, he'll keep on moving further.

Govindraj Ethiraj: So at this point of time, I know that there are some classes of investors who are obviously alert to what's going on. They're also usually ultra high net worth or high net worth. But do you feel that other classes of investors are also now seeking this change or seeking more broad based investment opportunities?

Nilesh Shah: The smart investors will figure out what they have to do. There are not so smart investors which will have to be educated. So it's a push and pull together.

And this is where mutual fund distributors play an important role. What we convey to them from a market view point of view, from a portfolio allocation point of view, they can amplify to their investors.

Govindraj Ethiraj: So I'll come to the supply side in a moment, but tell us a little bit about the regulatory architecture for doing all of this or for going in the direction that you're talking about.

Nilesh Shah: So regulator has been very helpful, very encouraging. Many of the regulations happen through co-creation by mutual fund advisory committee or interaction with mutual fund association MFI. Obviously, as a regulator, they have to build safeguards to ensure that retail investors can trust them.

But this is one of the best regulatory architecture we have, very open, always co-creating regulation. And I think we'll work with them to create more innovation.

Govindraj Ethiraj: Let's say if you were to take a specific illustration, since you touched upon real estate alternates, what would be the fund or how would a fund that you would like to envision look like? Let's say in six months time, assuming you could offer that product.

Nilesh Shah: So one product which I would have loved to launch is a gold fund which buys options. So I could have created principle protected gold participation. The options would have given me upside of the gold without any downside.

And the cost of gold option would have been, let's say, x percentage, 5, 7, 10, whatever the market will be. Balance, I can invest in fixed income and create, you know, a pool for manufacturer, for distributor and still give something to the investor. So imagine appeal to a person.

If gold prices go down, you get your principle plus something back. If gold prices you go up, you get your principle plus the gold appreciation plus something more. This is the way to, you know, bring investors into mutual fund porting.

Govindraj Ethiraj: And you say gold because that's more tied to the dollar.

Nilesh Shah: It has universal appeal.

Govindraj Ethiraj: Okay. So you also touched upon real estate and you also talked about alternates. So tell us about what could be the products.

Nilesh Shah: Govind, so many people have invested in real estate and put it on to rent. The next generation is not in the same city or not in the country. How are they going to manage that real estate?

Now, do you need exposure to real estate as a portfolio? Answer is yes. So can we create products which are similar to retinuate where a customer can probably come for the expertise of mutual fund manager in managing the real estate portfolio?

Could it be office premises, hotels and many other such forms, shopping malls and so on and so forth. So I foresee a scenario over a period of time where most retail investors would have let go their individual property and moved into retinuate so that it can be passed on to next generation with much less trouble.

Govindraj Ethiraj: So this is already happening in a small way because we have a listed universe and we have unlisted as well, where really more, let's say, smart investors are participating. So to bring it to a retail investor, which means also going to Securities and Exchange Board of India and saying this is what we want to do. What is the process looking like?

Nilesh Shah: So again, first we need to have the talent to manage that. Second, we are venturing into slightly or mostly illiquid security. So it has to be close ended in nature or at best interval in nature.

We also will have to popularise loan against mutual fund because many a times when fund is illiquid, a loan against mutual fund is a good way to provide intermittent liquidity, albeit which comes at a cost. And finally, when we have the combined package, we can go to the regulator and say that, look, these are the changes which we need. There are these risks, which is this is how we are managing.

And hopefully this is a product which you think appropriate enough for the retail investor.

Govindraj Ethiraj: And are you also thinking of, let's say, for example, there are some alternates or obviously doing venture investing or private equity investing, which may be on a higher risk scale. So are you also thinking of those kind of options?

Nilesh Shah: So again, that's a very attractive option. We can bring retail investor to participate in the unlisted market. And most importantly, we can give them the diversification.

Today, you can be a part of angel network and go and invest directly, but you're unlikely to get the diversification which a mutual fund can provide. Undoubtedly, those are the products which will result into further expansion of mutual fund among investor base.

Govindraj Ethiraj: Where we are today, right now, in the middle of 2026, how fast do you think we need to move in terms of expanding this to go back to that equity is not right.

Nilesh Shah: Equity is right, but mutual fund is not just equity. Ideally, we should have done it yesterday. But the real challenge goes in this talent.

How do I get the talent which knows how to manage this portfolios or the risk? Talent remains a constraint. And once the talent pipeline is available, I think we will see more and more product launches.

Govindraj Ethiraj: When you say talent, so it's one fund which might be investing in real estate plus metals plus ventures. So you need three different people for this? Or could it be that one person who has the ability?

Nilesh Shah: One we need for allocated that talent, I think is available. But we also need specialised persons to manage. For example, the SIF was given permission in February of 25.

We launched our product in July 26 because we didn't have the talent and without talent, how can I launch a product? So my observation is that the longevity or persistency of mutual fund supported investor is far more than do it yourself investors. Do it yourself investors are mostly momentum chasers.

They come for momentum and invariably momentum does not deliver better return to them over a period of time. Whereas the distributor supported investors stay through the ups and downs and that persistency delivers better return. My impression is that the mutual fund supported distributor portfolios have outperformed do it yourself investors portfolio by a margin.

Govindraj Ethiraj: Interesting. And you say that because maybe let's say if the markets are not looking good, I call the distributor and distributor really does the counselling part more than anything else. And therefore I hold on.

Nilesh Shah: See, convenience sometimes can create confusion. You are able to move so quickly in today's do it yourself environment that you end up committing errors. With the distributor, at least he's able to caution you against greed.

He's able to support you against fear. And that equilibrium is better maintained with that second opinion.

Govindraj Ethiraj: I mean, for those who are listening, so what is the two or three questions I should ask my distributor before I take that decision of where to put my money?

Nilesh Shah: Is my portfolio helping achieve my objective? Second, is this portfolio good enough for my risk? Or am I taking too much risk or too less risk?

These are the two questions you have to ask. You are investing based on your risk profile. Don't carry too much risk than what you can afford.

Otherwise, you'll become fearful. At the same time, if portfolio is not helping you achieve your goal, then why are you running that portfolio? Now, how many distributors you have shared your goal?

It's a relationship. It's not a transaction. As long as the portfolio helps you achieve your financial freedom goal within the risk tolerance limit acceptable to you, you are on the job.