Cracking the retail challenge, creatively

This is a guest post by Sreekant Vaithiyanathon , a certified financial planner. He is the founder of  Money Care Solutions, a financial planning and advisory firm. He is a freelance trainer and author. He has developed content for many AMCs and insurers.

I have a lot of admiration and respect for Sreekant and am delighted that he agreed to share this fantastic article here. Although the article is aimed at financial advisors and mutual fund distributors, it offers considerable food for thought for individual investors.

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Mutual Funds (MF), originally conceived as an investment vehicle primarily aimed at the retail investor (let‘s call him Mr. Retail) is still furiously courting him even after a full 50 years after the conception. Most efforts in getting him to consider MF have not brought about any perceptible change in his aversion for MF. And it is too early to judge the efficacy of the recent additional incentive for the B-15 distributors. But is it all that is required to get Mr. Retail into MFs? Or is there more to be done? Read on.

Understanding Mr. Retail

Mr. Retail’s investment behavior is quite puzzling. Shockingly, he is trying even the high risk options like money lending, currency & commodity speculation and patronizing Ponzi schemes apart from buying a plot of land hundreds of miles away from his sight or other human settlements. But strangely, he is not comfortable investing in a well regulated and professionally managed MF! And sadly, the insurance industry is managing more of the Mr. Retail’s wealth than the MF industry. So what’s worrying him so much about MF? Delving deeper, there are many reasons for Mr. Retail giving MF the miss. Some of them are based on facts and the others, simply on perception. Here’s a look at some of them:

Reason for avoiding MF

Based on fact or perception?

Explanation

Remedy

Possibility of loss of capital

Predominantly perception

Mr. Retail’s favorite gold and real estate too face this. Even government bonds may pay out an eroded rupee.Investor awareness programs must go beyond MF education. They should aim at SUBTLY analyzing and highlighting investor misperception of risk and sub-optimal investment choices.
Uncertainty in returns

Both

Uncertainty may be absent in deposits but does exist in others like currency, commodity, gold & real estate.
Tax difficulties

Purely perceptional

MFs probably enjoy the most favorable tax treatment. Investors sometimes are forced to convey white money into black with gold & property investments.Create awareness among investors on the continually tightening tax administration regime and the futility / danger of evading tax.
Absence of a utility value to the investment

Both

They see a utility value in the house, ULIP or jewellery that they invest in. But there is no tangibility to the MF investment.A “solutions” centered approach elaborated later in this article should help.
Lack of access and visibility

Fact

They can see bank branches, jewellery shops and real estate brokers everywhere. But MF offices and agents are scarceThe MF utility platform with a pan Indian presence could improve this aspect.

There are three principal stake holders in the MF industry namely the fund house, the distributor and the investor. The regulator has been deliberately left out as SEBI may not have a development mandate, unlike IRDA. Obviously, all the three stakeholders have to flourish if the industry is to be a thriving one. And logically, all of them will have to work to achieve this. But presently, the most important stakeholder and the intended principal beneficiary of the MF concept, the investor, simply does not seem interested. That leaves the other two stakeholders (fund house and distributors) with the onerous task of on-boarding Mr. Retail into the MF fold.

What can the fund house do to on-board Mr. Retail?

Apart from creating simple products that turn out consistent returns, there’s more that a fund house can do towards this end.

1.     Think beyond MF: Sadly MF have to compete with insurance, gold, real estate and deposits for the investors’ wallet. That being the case, MF cannot keep talking just about its own product. They need to somehow convey to the investor on how MF is superior to other investment products. MF should look at the Amul style of making contextual communications. Make the investor realize that “Emu schemes may cheat, but MF schemes do not” or “Liquidating real estate may be difficult, but with MF it’s a cake walk” or “A chit fund may vanish but a Mutual Fund won’t”. Resorting to behavioral finance subtly in the investor awareness programs seems inevitable as logic alone may not work always.

 2.     Become more investor & distributor friendly: Different application forms, different procedures even for simple tasks make life difficult for the other two stake holders. Regulatory requirements add to the complication. Fund houses need to do all that is in their control to ease life. The account statement can be made more meaningful by giving not only data (list of transactions) but also useful information like “Your investment in this scheme has earned 9.24% (XIRR) over the holding period”. Instead of folio or account number, the investor may be given the facility of naming his folio like “Ravi education” or “Retirement”

What distributors can do?

1. Present solutions to clients, not products: It is human nature to ask “Why should I do it?” Instead of selling products, try to provide solutions to investors. This is where insurance scores over MF. What can a client achieve with a Rs.1000 SIP? Certainly any financial goal of the client is going to need more. When presented in the right context and frame, he may be willing to invest much more than this.

 2. Upgrade skill too, not just knowledge: Any amount of knowledge is not going to help if the distributor cannot make it work. Good communication and other soft skills are necessary to succeed in garnering business. Basic financial skills (like spreadsheet) and presentation skills would improve distributor confidence, image and business performance.

End note: When Indians (including rural India) can adapt so readily to social media, smart phones and ATMs, how can an old concept like Mutual Fund be as alien to them as it is now? We cannot keep doing the same things and expect different results, can we? Some creative thinking and actions should certainly help MF emerge as a preferred destination for Mr. Retail

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This is a guest post by Sreekant Vaithiyanathon , a certified financial planner. He is the founder of  Money Care Solutions, a financial planning and advisory firm. He is a freelance trainer and author. He has developed content for many AMCs and insurers.

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16 thoughts on “Cracking the retail challenge, creatively

  1. Raghu Ramamurthy

    The actual performance of most of the mutual funds during the last 5 years is not good.The MF manager gets bonus if the fund performs better than the benchmark index.The bench mark should be changed.For example the comparison should be MF return vis a vis a fixed deposit interest rate of say 12%.

    Reply
    1. Satish R Kotwani

      Having two benchmarks (i.e. benchmark index and FD return) is not practically possible, since every mutual fund scheme is required to invest the money according to its mandate. If the scheme is an equity scheme it is required to have 90-95% exposure to equity stocks. It can invest in CBLO or Money market instruments but only for a very short time, basically to manage liquidity.

      What you have suggested can be done with a Hedge Fund (i.e. Alternative Investment Vehicles). Hedge funds can very well move their money from one investment avenue to another as per their mandate.

      Reply
  2. Raghu Ramamurthy

    The actual performance of most of the mutual funds during the last 5 years is not good.The MF manager gets bonus if the fund performs better than the benchmark index.The bench mark should be changed.For example the comparison should be MF return vis a vis a fixed deposit interest rate of say 12%.

    Reply
    1. Satish R Kotwani

      Having two benchmarks (i.e. benchmark index and FD return) is not practically possible, since every mutual fund scheme is required to invest the money according to its mandate. If the scheme is an equity scheme it is required to have 90-95% exposure to equity stocks. It can invest in CBLO or Money market instruments but only for a very short time, basically to manage liquidity.

      What you have suggested can be done with a Hedge Fund (i.e. Alternative Investment Vehicles). Hedge funds can very well move their money from one investment avenue to another as per their mandate.

      Reply
  3. chetan shenoy

    Very good eye opener article.. think Financial inclusion in India might have a considerable role to in the development of MFs with major population still being underbanked.

    Reply
  4. chetan shenoy

    Very good eye opener article.. think Financial inclusion in India might have a considerable role to in the development of MFs with major population still being underbanked.

    Reply
  5. Somebody

    Mutual funds are for fools, they mostly hide behind too many rules and move very slowly, ( and are long-only ) compared to individual investors. They also charge huge fees compared to brokerages and navigating their statements is really difficult. And why would I make some MF manager rich just because he has an MF? They mostly look for themselves and the big investors, not the little guy like me on the street. US64 was the only believable fund and that tanked, after that which sensible person will put money for an MF? I am better off in ETFs which track Index with low fees than paying hugely for an MBA guy.

    Reply
  6. Somebody

    Mutual funds are for fools, they mostly hide behind too many rules and move very slowly, ( and are long-only ) compared to individual investors. They also charge huge fees compared to brokerages and navigating their statements is really difficult. And why would I make some MF manager rich just because he has an MF? They mostly look for themselves and the big investors, not the little guy like me on the street. US64 was the only believable fund and that tanked, after that which sensible person will put money for an MF? I am better off in ETFs which track Index with low fees than paying hugely for an MBA guy.

    Reply

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