imgbd Advisor Speak

Are we creating informed investors or confused investors?

Surendra Kumar Bagaria, Kolkata

9th November 2015

In a nutshell

Bagariaji points out to the steep decline in equity MFs as a % of total market cap over the last two decades, to ask a pointed question: have we really served retail investors or let them down?

Fantastic product returns from equity funds are not being captured into investor portfolios - and many experts are quick to point out that investor emotions that vacillate between greed and fear are to blame for this situation.

Bagariaji argues that many of our actions in the industry - between fund houses and distributors - actually create confused investors and not informed investors. It is only when responsible advisors create informed investors, that this situation can be rectified - and it's only then that everybody in this value chain can justify his or her remuneration. Of what use, he asks, are great product returns, if they cannot be transmitted into investor portfolios?

Lets begin with the basics. Mutual fund as an investment vehicle came into existence for servicing investors - predominantly, small investors. It is small investors who need and use collective investment vehicles - large investors have many more options. All the participants of the MF industry - AMCs, distributors and R & T agencies, were offered an opportunity to make a career by providing their respective services to investors, within a regulated frame work.

Have we served the retail investor, or have we let him down?

I am not sure how many of us remember this fact: till early 1990s UTI and SBI had some closed ended equity MF schemes with an equity exposure worth Rs. 9,000 - 10,000 crores against a total market capitalization of around Rs. 105,000 crores. That works out to around 9-10% of total market cap. Since 1992-93, in the last 22 years, we have more than 500 equity schemes from over 30 active AMCs in the country. One would have imagined that between 30 fund houses working for over two decades, this percentage would have increased significantly. The sad fact however is that today, equity fund AuMfo around Rs. 4 lakh crores is merely 4% of total market cap which is now in excess of Rs.100 lakh crores. The small Indian investor served by fund houses has seen his slice in a growing pie shrink from 9% to 4% in the last two decades. At the same time, FII's share of this same growing pie has ballooned from 0.5% to over 23% in the same two decades.

Doesn't this call for deep introspection? Have we collectively as an industry, really served the small investor well over these two decades? Who has really benefited the most from India's market cap growing 100 times in the last 2 decades - the retail Indian investor or the FII? If the FII has reaped the benefits so spectacularly, why did our retail investor not do likewise? Why have we come to a situation where the average Indian citizen has been deprived of the fruits of economic development of his own country?

From the country's perspective, our industry's collective inability to channelize increasing household savings into the capital market over the last 2 decades, via mutual funds, has made us more reliant on FII flows than we really need to be.

Why have equity funds not become a pull product, despite performance?

For all us industry participants, this collective failure has meant that despite our equity funds delivering spectacular long term returns, the equity fund continues to be a push product and has failed to be a pull product. If real estate and gold became pull products over the last two decades, and equity funds continue to be a push product, despite equity funds delivering much better performance than real estate and gold, where have we gone wrong as an industry? Investors are drawn by returns, and as gold and real estate have shown, they don't only go where there are guaranteed returns.

Our industry's key problem, as I have written earlier too, is that while the product has delivered great returns, these returns have not been captured in investor portfolios.Now, the most common refrain we hear to explain this sad situation is that investors often make incorrect investment decisions, driven by greed and fear. It is the investors' inability to control their emotional impulses, which results in them buying high and selling low, and therefore getting a poor experience from equity funds.

Don't blame only investors' emotional impulses

That in my view, is not the complete picture. If our industry is here to serve the investor, we have to ask ourselves what we need to do to serve our investors better, in order for them to actually see in their portfolios, the kind of returns that our products are capable of delivering.

Are we creating INFORMED investors or CONFUSED investors?

We as distributors are carrying two kinds of messages from fund houses to investors, both of which are really not helping investors. The first is our habit of carrying fund manager views to investors. Fund managers give near term views, views on next quarter's earnings outlook, sectoral views, tactical views, global views, local views, macro views, and so on. It is important for us as distributors to understand market situations and hear a variety of views, but it is completely incorrect for us to carry these views to our investors. The more we discuss views with investors, the more we confuse them and the more short term oriented we make them. Our job is to imbibe all the information we receive, distill that into our own views and convictions, and then transmit only our convictions to our investors. Convictions are never near term - convictions are always long term. Our job is to use all the information we receive to test our own convictions as part of our due diligence process. Where we believe our stance needs to change, that's when we need to communicate it to our clients, explaining the rationale. But, keeping on feeding a variety of fund manager views to our clients, does not help us create INFORMED investors, it helps create CONFUSED investors.

Fund house sales promotion strategies do not help investors

The second kind of message from AMCs to us is sales promotion strategies that fund houses come up with from time to time, for specific products. When we start aligning our efforts with a fund house's sales targets for a quarter, our messages to our investors is very often not in the investors' best interests. Such messages from fund houses, we must understand, have really nothing to do with helping investors capture long term product returns into their portfolios messages. Taking these to our investors means that our own consistency in client communication suffers, our efforts to create INFORMED investors suffers.

We need an enlightened sales process

Our job is to create INFORMED investors, and for that, we need an enlightened sales process. A sales process where we absorb all the information we need to keep building and testing our convictions, and then communicate and keep reinforcing our long term convictions to our investors. Our clients will stay invested for the long term when they see high conviction and consistency in our recommendations. I strongly believe that this emotional behavior of investors that is often blamed for poor transmission of product returns into investor portfolios, can be largely controlled by making our clients INFORMED investors. There is I repeat, a big difference between and informed and enlightened investor and a confused investor.

We are in this profession to create happy investors

We must remember that we are and will remain in this profession, only to the extent that we are able to create happy investors. And we create happy investors only when we enable them to capture in their portfolios, the healthy returns that our products are capable of delivering.

Anything that comes in the way of enabling this basic function, is not good for our investors and therefore not good for us. Fund houses need to understand what sales strategies enable this objective and what detract from this objective. We as distributors need to likewise be enlightened enough to understand what actions of ours helps this basic objective and which actions come in the way of achieving this objective.

The bottom line

The bottom line is that our remuneration - whether in fund houses or among distributors - comes not from our knowledge or skills or hard work, but from creating value for the investors we serve. And the simple and only yardstick of this value is whether we are enabling them to capture in their portfolios, the returns that our products are delivering. Of what use is a product's return, if it cannot be transmitted into investor portfolios?

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