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Ashish Modani, SLA Investment Centre, Jaipur receiving his Think BIG - Think Innovation award
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Lack of trust is the biggest roadblock
Investors at the retail level by and large do not really trust mutual funds as a good investment vehicle. This is quite obvious to all of us distributors and is also seen in the shrinking mutual fund folios even as household savings continue to grow.
For a typical retail investor, post office, Fixed Deposit, insurance policy etc are good for short term as well as long term needs. When it comes to corporate investors, mutual funds are seen as an effective investment vehicle. The obvious reason behind this disconnect is that for retail investors, mutual fund means stock market and for corporates, mutual fund means a tax efficient entry into debt markets.
Weak equity market returns over last several years have made the retail investor wary about mutual funds. Along with the distrust about the mutual fund product, investors start distrusting the mutual fund distributor, since he is the face of the product for them.
What should we do in this situation? Does it mean we stop distributing mutual funds? Does it mean we too start believing that mutual funds are not meant for retail investors and that they should be owned only by corporate investors? If we believe that mutual funds have a place in every retail investor's portfolio, how do we first create an environment of trust and confidence in ourselves and then in the mutual fund product?
2 step solution to overcome the trust gap
This is what I have been focusing on over the last 2 years. There are two things I realised when I started thinking about how to modify my approach to boost my investors' confidence in mutual funds.
(1) First help clients with their short term goals, then tackle the long term goals
In our enthusiasm to get our clients to adopt a goal based approach towards their investments, we often get straight to their big long term goals - which are several years down the road - like children's higher education or retirement. These goals are most important - but fulfilment is many years away. How will an investor gain confidence in the product until it actually enables him to meet these obligations several years later? And, while he is regularly saving up for that goal, if he sees his savings amount erode due to market fluctuations, his confidence will naturally go down. He sees on the one hand his bank deposits are safe and secure while his equity SIPs have lost value. Naturally, his confidence will come down - and it becomes an uphill task for us to restore his confidence.
The fact is that in addition to these long term goals, investors have many more short term goals for which they are saving money. Somebody may be saving money to collect the down payment for a house, somebody may be saving for a new car, somebody may be saving for a big annual vacation. We realized that if we cannot fulfil their short term needs, it is hard for them to believe us on their long term financial goals. We need to first show them smart ways to save for these short term needs and build their confidence in us and in our products. That confidence will help them stay on course when their savings for long term goals go through fluctuations due to market volatility.
For short term needs, there are a range of good accrual based debt funds that can help our investors much better than just accumulating balances in their savings account. Very few investors are really aware of these products - because they continue to believe that mutual funds are all about equity.
(2) Go step by step - like how my father taught money management to me
My father, in my childhood days opened my savings bank account and gave me the passbook. He often asked me to deposit and withdraw money. Later, he advised me to start up a Recurring Deposit in the bank out of my savings from my pocket money. Later, he asked me to convert the RD amount into a FD and when I got into my job, he then taught me equity investment and started my SIP.
This seems to be a logical approach and I thought lets teach the client the natural way of learning finance. With the help of Reliance Mutual Fund which offered ATM with their liquid fund investments, we started talking to investors about it. Earlier, there was resistance as they were not comfortable with the name mutual fund, but we asked them just to deposit Rs. 5000 and then withdraw the same after some time. That gave them the much needed confidence. A typical investor would first invest a very small amount and gradually, he started parking a substantial amount of his liquidity in these funds.
SIP in debt funds was next logical step to us. Indians love to save regularly and that is quite visible with the success of all recurring plans by either banks, post office or even insurance policy such as jeevan saral. We then started promoting SIP in Debt funds and we chose short term funds for the same. Templeton India Short Term Income Plan was our favourite choice but they did not have SIP concept in that fund. With detailed discussion with FT management, they initiated SIP in the same fund. The fact is now they also show SIP return in their fact sheets. Gradually, liquid fund and SIP in debt fund was something that gave the much needed confidence to people at large.
Soon, we started lumpsum investment in accrual based debt products and that gave our AUM a big lift as well. Current debt market scenario may not be conducive, but I am sure with accrual strategy, we will be able to sail through the storm. We never advised dynamic bond funds or long term bond funds to investors. What was important to give them consistency and not high return.
Very costly affair
It is always easier said than done. The above mentioned approach was really painstaking and costly affair as well. We all know how much can we earn from liquid fund and that too handling retail investors with liquid fund. It is really not easy but then I realized that we need to follow the same mantra which we constantly talk to investors - " equity is long term and in between there will be periods where you will not make money or you may incur notional loss".
My business to me is my equity and I should be ready to take short term losses for long term gains. So that's what motivated me to work even though I was not making enough money with every investor I made. It was important to gain his confidence and later make money from him.
To reduce the cost, we concentrated on corporates where many individuals work rather than on individuals only. Strategy was to convince the main person in the corporate house and get him started. Over a period of time, once he is convinced he would promote us to his colleagues as well - and that referral would give us sufficient number of clients to make the effort viable for us. With more number of clients, we can always make more money by cross-selling other products like term insurance, mediclaim etc.
At the start of this financial year, my team and I took targets for the year. The target was not to add many crores to AUM but was to add 365 new clients with us. Once we have more number of clients, increase in AUM and our revenue would be by product which we will anyway get.
My learnings of last 10 years
Lack of trust with mutual fund investments among retail masses is the biggest issue. This lack of trust does not mean the product is bad - it probably means that we did not offer them the right set of products and strategies so that mutual fund could be in their radar. I call it a poor mathematics of mutual fund industry.
Investors wanted a FD plus return
Industry sold them expectation of FD multiplied return
When they got FD divided return
They are now minus from the industry
I would urge the entire industry to make this retail oriented industry really retail. I would urge manufacturers to come with strategies to promote retail penetration and not just concentrate on monthly and quarterly growth. I would urge manufacturers to differentiate the colour of money. Rs. 1 crore investment from one client is given the same amount of compensation or rather more at times, than Rs. 1 crore collected from 100 clients. In reality, manufactures make more money from 100 clients than 1 client and it is distributor who spends more time and effort to get 100 clients than 1.
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