Kapil Khurana is a veteran in North India's IFA community. A highly successful IFA - who has built up an AuM of over Rs. 100 crores from 200+ families from a small city of Amritsar, Kapilji is also a passionate believer in retail debt funds and has been a strong advocate of this product segment for several years - much before most AMCs woke up to the business potential of retail debt funds. In this article, Kapilji draws on his considerable experience to list out what he thinks the industry should do if it really wants to harness the BIG opportunity that this segment presents. Not a man to mince many words, his belief is very clear - taali do haaton se bajti hai - it takes two hands to clap. AMCs and distributors need to change some of their ways to harness this BIG opportunity. Read on as Kapilji explains how.

I have been a strong advocate of retail debt funds for several years, and I have always believed that the fund industry was always thinking small by focussing only on equity for retail investors all these years. Indians are great savers but very risk averse investors - we all know this, and we have known this for years. But, unfortunately, for the past two decades, the MF industry has been almost entirely focussing on equity when it comes to retail investors. I am happy to see that the fund industry is at least now waking up to the huge potential that retail debt funds offer all of us.

If we have to truly harness the BIG potential from retail debt funds, we as an industry need to adopt a partnership approach. Taali do haaton se bajti hai (it takes two hands to clap). There are some changes that AMCs will need to make and some changes that we advisors and distributors will need to make.

Pehla haath - AMC ka

Keep the focus on retail debt alive even after the rate cycle turns

1. My number 1 point to AMCs is that while the current focus on retail debt is very welcome indeed, please let it not be only a function of your current positive view on the rate cycle. Each time the interest rate cycle looks favourable, we see tremendous interest from AMCs on retail debt - and the moment that favourable phase passes, their focus on this segment also goes away. I would like to see all AMCs remaining committed to retail debt as a business opportunity - not just for the next 1 year from a rate cycle view, but for the next 10-15 years, as a great business opportunity.

No flavour of the season products please, in the retail world

2. If you have this kind of unwavering focus, what you will do is to have clearly defined products for different time horizons - Upto 3 months, 3 months - 12 months, 1 year - 3 years and above 3 years. For each of these 4 broad time horizons, create products with a well-articulated mandate in terms of accrual strategy and duration strategy - and then stick to it throughout. Give the fund manager enough latitude to do what he thinks best within the mandate for each fund, based on evolving market conditions. But please don't sell an idea to an advisor as an opportunistic play, ask the advisor to do likewise with his clients and then come back 3 or 6 months later saying the view has changed and therefore its better now to switch from product x to product y. This typical mentality may be very good in the institutional space, but you cannot employ this strategy in the retail world. I don't think I will want to go even to my more experienced HNI clients and tell them that while we discussed a strategy 6 months ago and got into a fund with a 1 year + perspective, now the view has changed and therefore we need to switch the fund. It shakes an investor's confidence - especially when you are talking about debt - where he expects safety and reasonable predictability in returns. In this context, the focus on Dynamic Bond funds is welcome, although I wonder whether a pure long duration fund is the right product to be pitching in the retail world - for exactly this reason. Please don't come up with any flavour of the season products and ask distributors to push these in the retail world - you will only do more harm than good with this approach. In the retail world, please focus on all weather products for each of the 4 time horizon buckets.

Focus on higher predictability of returns, even if you sacrifice some returns in the bargain

3. Create products that are higher on predictability of returns and lower on volatility - even if it means sacrificing some returns in the process. Please understand this - when retail investors park their money in debt products, they are primarily looking for safety and stability - not for high returns. Why do we want to sell a possible short term high returns story to retail investors when we think the rate cycle is turning favourable? Why can't we create and maintain all-weather products, through a judicious mix of accrual and duration strategies - which we can all confidently recommend at any point of time in the market cycle? Bank deposit rates sometimes go down to 6% and sometimes above 10% - again based on the rate cycle. Banks don't stop selling bank FDs at different points in the rate cycle. Customers don't stop parking money in bank FDs if rates go low. When it comes to debt, its safety and stability first and returns comes much later for an average retail investor. If AMCs are able to embrace this understanding and evolve suitable products that cater to this basic need of the retail investor, we distributors will be very happy to go out and vigourously market them.

Doosra haath - IFA ka

Don't base your business model on commission structures

1. My first piece of advice for my IFA friends is that if you are still adopting a product led approach towards your business, please make a change in this approach. I still see many IFAs who decide on their product focus for the month or quarter based on the commission levels that different AMCs are offering on their products. This kind of a short term view will not help us in the long run. If some AMC gives us a hefty commission for pushing their gilt fund this quarter and backs it with an optimistic flavour of the season market view, please stop and consider whether this is really in your clients best interests or should you stick to a set of all weather products which you are comfortable recommending at any time.

Gain clients' faith with debt first, then go for a proper asset allocation

2. The most important thing we need to realise is that clients do not like losing money. If they have faith in their advisor, they will live through market volatility. If they do not have faith in their advisor, the same volatility will be seen by them as portfolio loss and they will want to exit. Once we understand this basic fact, we have to realise that starting a new client relationship with a proper asset allocation may not always be the most appropriate. Often, it pays to start off with safe and steady retail debt funds, allow the customer to get comfortable with you and your advice and then move to the next gear of suggesting a proper asset allocation based on risk appetite. If you advice volatile products even before he develops faith in you, you are getting into an uphill climb trying to explain volatility when it hits him.

I have so many customers who came to me a couple of years ago, whom I only recommended good FMPs and then rolled over that money into other attractive FMPs when they matured. Now, when the second round of maturities are happening, these same cautious investors are very willingly going ahead with a proper asset allocation across asset classes that I am suggesting to them now.

Today, when I look around me in Amritsar, there are hardly 10-15 active IFAs - who put in at least one MF application per day. This is a far cry from the heydays where there were 100 plus. If you adopt a long term, sensible approach, you will always remain in business - else, you will have to look for another business.

Break the investor mindset of mutual funds = equity

3. In a retail investor's mind, mutual funds are synonymous with equity. Just like Colgate is synonymous with toothpaste and Dalda with vegetable oil. Go and meet a new prospect and introduce yourself as a mutual fund advisor today, and chances are he will want to run away as far as possible from you, because he instantly associates you as an equity salesman. It is here that retail debt funds can help you begin a conversation on the right note. Think about this : if you were to tell a new prospect , "Sir, I have a product that offers you high safety, instant liquidity and higher returns than your savings account", how do you think this prospect will react? Will he be interested in hearing more or will he still want to run away thinking you are an equity salesman? The fact that majority of retail investors will still stop to listen tells you how little a wonderful product like liquid funds has really penetrated into the retail market. Therein lies our opportunity. If we are able to break this mindset of mutual funds = equity, you will be able to build a business that is not dependent on the vagaries of the stock market, but is more dependent on the quality and appropriateness of your advice.

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