WF: A frequent issue that we hear very often is that there is a wide disconnect between returns generated by equity funds (product performance) and returns generated by investors (investment performance). What tangible steps should we take as an industry to bridge this gap and deliver superior investment performance in investor portfolios?
Harshendu: Investors attempting to time the market rather than spending more time in the market is a big cause for this disconnect in returns. The general tendency of redeeming one's investments in the bear phase of the market can be very damaging to portfolio returns. The solution lies in making investors understand that bear phases are "opportunities to buy cheap" rather than pressing the panic button and redeeming one's investments.
We need to educate investors on the benefits of staying invested for the long term. Investors do follow this principle when it comes to other asset classes like real estate and gold but they need to extend this approach while investing in equities. Keeping this in mind, we are encouraging distributors to advise their clients on starting "Perpetual SIPs". This does away with the hassles of renewal but still keeps the liquidity feature intact.
In addition, we also need sustained communication especially during bear phases to discourage redemptions. Increasing engagement levels with investors during market corrections / downturns and trying to convince them to hold on to their investments will be the key.
WF: What are some of the key drivers in developed markets that have enabled investors to take a longer term view with their equity investments and reap the benefits of long term wealth creation? What insights can we pick up from global markets?
Harshendu: Replacing defined benefits by defined contributions and linking equity mutual funds to meet retirement goals are some of the key policy initiatives in developed markets which have encouraged long term equity investing. The 401(K) retirement plans introduced in the USA in 1978 are among the most well-known.
This regulatory push has incentivized longevity in capital market investments through built in tax efficiencies. India too has begun to move in that direction with the launch of a defined contribution based National Pension System (NPS) in 2004. A big change in this direction was announced in the latest budget when the Finance Minister stated that 'an employee may opt for the EPF or the NPS'. This could be a great leap for long term investments in the capital markets though more clarity is awaited.
Extending these benefits to Mutual Fund Linked Retirement Products (MFLRP) should just be a matter of time as improving the reach of private sector pension funds would clearly help reduce the government's fiscal burden towards pensions.
WF: The quest to create well informed investors is without doubt a great step towards creating successful investors, but information is increasingly being seen as a double edged sword, as more information from multiple sources, makes investors more short term oriented rather than long term oriented. Is this a trend you worry about? What should we do to create well informed wealth creators rather than well informed short term investors?
Harshendu: I agree that too much information is harmful. It can only confuse the receiver. But in the same breath, let me confess that the task at hand is not easy. There needs to be a balance in how one treads this path because you don't want to be in a situation where you have not provided the information required for the investor to take a decision.
There are many paths to creating "long term wealth". We have tried to address the issue at the distributor level by pioneering the all trail model which incentivizes distributors to go for stickier assets as well as helps to annuitize their income.
Consolidating "me too" products is another area that needs urgent attention. The recent budget which announced tax neutrality to mutual fund mergers may help this cause and lead to consolidation of schemes which have similar objectives.
AMCs may also exercise restraint of adding more products with similar objectives to their stable of existing products.
WF: Among retail savers, what in your view is the bigger stumbling block - lack of awareness about equity funds or a perception that equity is too risky? What direction should investor education programs therefore focus more on - basic awareness or dealing with risk perceptions?
Harshendu: I think it's a mix of both. Lack of awareness is clearly the stumbling block. There are various myths associated with mutual fund investing which need to be demystified with consistent communication in a manner and language that people are comfortable with. We have tried to follow this in our Franklin Templeton Academy which is available in 5 languages. It is more important to highlight how mutual funds can help to meet life goals rather than just being an investment for capital appreciation or tax saving. Mutual funds have always been pitched as products and never as a solution. If one stays invested for sufficiently longer periods of time, they can prove to be an exceptional option to fulfil life goals such as building a kitty for one's retirement or for your child's education and marriage.
Speaking about the perception of risk, the fear of losing is always greater than the pleasure of gaining. We need to constantly address the fact that the longer one stays invested, the probability of loss only comes down. This requires a mindset shift which will take time. But I believe that as more and more investors come to terms with the fact that returns from assured return products do not necessarily give better inflation adjusted returns; they will slowly build the mindset that taking "Risk" over longer periods is not bad for financial health.
WF: What would you ask your distribution partners to do, and in what ways can they engage with FT, to meaningfully move the needle of retail participation in equity funds?
Harshendu: As I have said in the earlier question, we need to work closely with distributors to change the retail investor's mindset from over dependence on assured returns products to gradually adopting a market linked investment portfolio. Secondly, investors need to be convinced to stay invested for the long run and experience wealth creation through equity mutual funds. There is also a strong case for distributors to sell mutual funds through a solutions driven approach (instead of product based selling) and map these solutions to investors' goals. Additionally, solutions which use an asset allocation approach help to cushion the volatility associated with a market linked investment portfolio. We would be very keen to help distributors move in this direction through relevant training via our Franklin Templeton Academy as well as through strong and relevant communication to support the cause.
WF: What would be your long term product strategy?
Harshendu: We would always launch products that help investors achieve their life goals. To aid this, we continuously strive to create an ecosystem that would aid to match the product with the goal, be it simple and relevant communication, distributor reach, ease of transacting, serviceability and access to information, among others. We would like our distributors and investors to remember us for our fund performance and expertise in the asset management business with an aim to be the fund house of their choice. We have been in India for over 20 years now and wish to keep honing the learning curve to meet the interest of our investors.
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