WF: What has been your experience in getting first time investors comfortable with equity? What are the key issues/objections that you face and how do you help them gain confidence and comfort?
Narayan: There are broadly two categories of "new" equity investors - those who are in their 20s and early 30s and those who are in the 40-50 age group, who have some previous experience with equity markets in a previous market cycle, but are new to equity funds.
The younger group have a desire to create wealth. They can easily be educated about the power of equity to create long term wealth. We normally begin their equity journey with a tax plan which is usually a lumpsum. Once that is done, we then talk to them about the benefit of starting a long term SIP linked to goals. Tax followed by goal based SIPs works very well in getting them into equity markets.
Investors in the 40-50 age group, who haven't yet considered equity funds, almost invariably have a previous bad experience with the market which acts as a huge mental block. We can't simply get them into equity funds by showing presentations, because their own experiences colour their judgement. I have found that persuading them to first come into MIPs and low equity hybrids is the best course of action. Once they get comfortable with this, we move them into balanced funds. The idea is to progress very gradually into pure equity funds - you need to allow them to flush out their previous bad experiences with better experiences from hybrids, before they can think of looking again at pure equity oriented investments.
WF: Does portfolio rebalancing happen with clients as often as you ideally desire? What are the issues that come in the way of implementing regular portfolio rebalancing?
Narayan: Despite sincere attempts from our side, its not always possible to actually execute periodic portfolio rebalancing. Let me give you some actual experiences. So, when we talk about long term returns from asset classes, we generally discuss that debt should give around 7 - 7.5%, balanced around 10 - 11% and equity around 14 - 15% over a market cycle. Now, in good times, in the first couple of years, equity delivers at or above long term expectations, while other asset classes obviously don't match equity. There are clients who will look at their portfolios and rue the fact that they put money into debt - had they put more in equity, they feel they could have made a lot more money. When they are in this frame of mind, try telling them to actually take out some money from equity and put into debt because they are overweight in equity!
Take another classic example: gold. For HNIs, we recommend a small allocation to gold funds - say 5% or maximum 10% as a portfolio hedge, as a portfolio diversification. When they see their portfolio statements and the returns on gold funds in the last few years, they invariably compare against other asset classes and keep asking us to exit gold funds and move the money to a better performing asset class.
The challenge is that while asset allocation makes good sense at the outset, for a number of clients, the context changes completely when they see their portfolio statements which show varying rates of return during the same period across different asset classes. The natural tendency is to back the winners - put more money into what has won in the last year, at the expense of those which lost the race last year.
Then there are some HNIs who simply love tax free bonds. You agree your asset allocation with them, but when the next issue of tax free bonds is round the corner, they prefer booking profits in equity and investing in tax free bonds. There is a huge attraction towards tax free bonds, which often overrides all our conversations on asset allocation.
WF: What are the challenges you face in getting existing clients to stay on course with goal based plans? What are the main reasons why clients deviate from agreed goal based systematic investments and how do you get them back on track?
Narayan: There are two different behaviours for the two main goals. When it comes to goals for children, I find investors are very disciplined and committed - there rarely is any issue about getting them to stay the course.
Retirement plans are a different story. For clients whose retirement is still 10-20 years away, they don't immediately relate to their retirement - its still quite far away. They see this as an investment pool which can be moved from one idea to another in the quest of higher returns - because there's still a lot of time before they will even think of drawing down from it. When markets go down, there is a propensity to consider other options. There is also always a great affinity for land. I see clients often coming to me and asking me to stop their retirement plan and redeem it, since they say they've found a great piece of land which they are sure will significantly appreciate in the next 5 years. They tend to treat accumulated savings in retirement funds as a fungible pool, which can be invested elsewhere - either when they get discouraged by market volatility or when they sense a good opportunity in land/property.
WF: How do you get clients to look beyond short term volatility and gain conviction in the long term story of equity markets? What strategies / messages have worked well for you and your clients?
Narayan: There are two different strategies - one at the inception and one during times of market volatility. At the inception, you need to sensitize clients about interim downside, you need to be clear that for horizons less than 5 years, please do not consider equity at all. That's the time you need to prepare them for downsides, so that it doesn't take them by surprise.
During the journey however, when volatility hits the client, you don't go around telling him "I told you so". 90% of clients just need reassurance - they are confused and anxious and are looking for support. Your personal conviction in the equity story will go a long way in giving them this conviction.
What works very well for me is that I have been personally an avid equity investor since 1982-83. I have decades of personal investing experience, which I share with clients in such times. This gives them a lot of confidence because they know I talk from experience and not merely hope. That makes a big difference.
WF: How important is profit booking as a way to ensure long term commitment towards equity?How useful are dividend payouts in helping investors stay committed for the long haul?
Narayan: I would say for most clients above 50, this becomes very relevant. As clients start actually thinking about retirement and life after retirement, they like to see some cash flows coming into their bank account from their investments. You can argue about the magic of compounding, you can keep reiterating that dividends from mutual funds is only a case of left pocket to right pocket - but the truth is while this is a persuasive logic for younger clients, those who are in the 50+ age bracket generally prefer some cashflows coming in. Dividend payout options are good for such investors. Regular profit booking also finds favour with such investors.
WF: Lakhs of investors came into the market in 2014 and 2015 and their experience so far has not been good. In what way can we help them stay invested for the long term? What should distributors be doing now, for these investors?
Narayan: Disappointment is at two levels - one is the market and second is underperformance of some big funds which garnered a lot of money in 2014, but have since significantly underperformed peers. On markets, as I mentioned, our job is to give all the bad news upfront and all the reassurance whenever volatility strikes.
But the other issue of underperformance of some big funds is a tricky one. Do you tell clients to just stay invested in the same schemes? You then further increase their anxiety - especially when your own conviction in a scheme has been shaken. In an environment where the market is not offering good returns, one must look proactively at where one can seek alpha for delivery into client portfolios. Switching client SIPs into funds you have more confidence in, is perhaps warranted in such cases, as it helps clients tide through difficult phases better.
One has to be able to distinguish the message of staying invested in the market for the long term vs staying invested in a fund for the long term. There are times when the two will diverge although you hope that such instances are rare. But, when you see such situations, you need to be proactive, in the interests of your clients.
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