imgbd MasterMind: Advisor Perspectives

Mumbai IFA creates "too good to be true" product

Apurva Mayekar, GenNext Wealth Advisors, Mumbai

In a nutshell

Clients want healthy absolute positive returns irrespective of markets. They want their money to work hard for them. And they love the idea of regular returns coming into their bank accounts - every month or quarter. Apurva Mayekar understands this very well, but rather than managing down these expectations, he has crafted a solution that delivers exactly what his clients are looking for. How would you like a solution that delivers 16-18% annual returns in bull and bear markets, and uses your mutual fund portfolio to lever up at zero financing cost, to make it a 32% return instead of 16%? Sounds too good to be true?

MasterMind - a joint initiative of Sundaram Mutual and Wealth Forum, encourages advisors to strengthen their client engagement by intelligently leveraging behavioural finance concepts. One of the core themes of MasterMind is the notion of using your left brain on the product side, but your right brain in the client engagement side - and not the other way around. Read on as Apurva explains his left brain product idea that caters to a very right brain investor need: healthy returns irrespective of markets.

I began my career as a financial advisor in 2002 with Jain Investments - in fact I was Vinod Jain's first employee. I learnt about mutual funds and SIPs from Vinod Jain. In 2010, I ventured out on my own. I saw in the 2011-2012 period how difficult it was to earn returns from equity funds for investors. I saw the difficulty in getting clients to stay invested through long periods of sideways markets and bear markets. That's what led me to start searching for better alternatives, to meet client aspirations.

Search for returns in 2011-12 led me to a new world of index options

In 2012, I came across the index options strategies being used by a specialist firm called Teji Mandi Analytics Pvt Ltd. Index options are a form of hedging strategies which offer you upsides while limiting the downsides. Intelligent use of index options strategies enables you to generate absolute positive returns on a monthly basis, irrespective of bull or bear markets. The firm had a few months of negative returns in the 2011 and prior periods, but ever since September 2011, they have never reported a single month with negative returns - even during the huge market volatility in 2013 or the more recent correction in Jan-Feb 2016. The worst month since 2012 for us was August 2015, when the Nifty slid significantly, but our portfolios delivered an absolute positive return of 0.4%. In the recent Jan-Feb 2016 correction, our portfolios delivered a positive 1.4% return.

On an average, this strategy is delivering a 16% - 18% annual return - irrespective of bull or bear markets. Being options, they get settled monthly, and therefore returns get credited into clients' bank accounts every month. Clients need to have demat accounts in order to set up these portfolio accounts.

50% margin funding - at zero cost: 16% becomes 32%!

When I studied the options trading rules closely, I came across NSE's offer of 50% margin for options trades, at no financing cost. It was NSE's way of promoting options trading on their exchange. This was initially offered against a set of stocks that would be marked as collaterals. I started approaching clients who had direct equity portfolios, and gave them an idea to further enhance their returns. We would mark some of their direct equity holdings as collateral and then invest in the index options strategies with only 50% cash payment. The other 50% would come in as margin funding - at zero cost - from NSE. This way, a 16% annual return gets boosted to 32%!

Utilize MF holdings as collateral

With the pickup in NSE's mutual fund platform, there is an exciting new option available to all mutual fund distributors. NSE has approved a list of MF schemes which have more than Rs.1000 cr AuM and which are listed on NSE, for this margin facility for options trading. Most clients have MF holdings which we recommend as long term investments. What we are now doing is to recommend that clients use some of these long term MF holdings as collateral, avail the 50% zero cost margin funding, and invest in our index options strategies. Needless to add, the mutual fund units have to be held in demat form to avail this facility. This strategy has two benefits: it doubles the returns from index options, and it also forces discipline in staying invested in these equity funds, even during volatile times.

I've gone through a lot of challenges in setting up this product for my clients. When I came up with the idea of earmarking mutual fund units as collateral for the index options strategy, it was clear to me that nobody had explored this idea at all. I had a challenge in getting fund houses to understand what I was trying to do, and to set up the facility in a manner that gives the required collateral to the clearing member, while retaining my ARN to enable my trail income to keep coming in uninterrupted. Sundaram Mutual was one of the early fund houses that helped us in this endeavour. Today, there are a handful of fund houses that have put in place the necessary processes, and my engagement continues with others to come on board, so that we can broadbase the bouquet of funds that can be offered as collateral for this unique facility. There are around 20 fund houses - including the top 5-6, whose units qualify for this margin funding arrangement. We need them to put in place processes to enable this financing arrangement to take place, without making an changes in the original ARN - else trail gets stopped.

Delivering a solution that clients are looking for

Now, with the MF margin financing strategy sitting on top of the index options strategy, I have a product that delivers exactly what clients want: healthy positive returns irrespective of bull or bear markets, returns coming in every month, and a kicker from zero cost leveraging of their long term MF investments. I have now started using this as my primary client acquisition vehicle. I have set Rs. 30 lakhs as the minimum investment in this product - it is clearly not a retail product, and must be offered only to savvy and experienced investors with commensurate risk appetite.

Too good to be true?

I first invested in this strategy myself - and now have a 3 year track record in my own portfolio to showcase to clients and prospects. I then started introducing this to known clients with whom I had a long and strong relationship. Only later, I started talking about this to prospects. The first thing that I see in prospects is an incredulous look - "this looks too good to be true". They get very interested, but also look for a catch here or there. I show them my own portfolio statement, the monthly returns over the last 3 years. I let them know the inherent risks in options strategies. When they see my own portfolio statements and the monthly track record over the last 3 years, their conviction increases. In most cases, since prospects come from referrals, there is added comfort.

I am not strong in marketing, but I do believe if I come up with a good product, word of mouth will bring in referrals. That's what I am seeing in my business lately. My AuM today is around Rs. 65 crores from around 70 client families. Out of this, the AuM in index options strategies is around Rs. 19 crores. I expect this to grow sizeably going forward, on the back of sustained healthy performance.

One of the benefits for my business is that apart from being able to attract new clients and deliver good returns to them, my mutual fund AuM remains very stable and committed for the long term. I don't need to worry about my trail stopping due to redemptions, switches to direct plans etc. Money invested for the long term genuinely stays for the long term, which helps my clients as well as my business.

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