Think BIG : Think Retail Debt 8th June 2013
We successfully changed our game - so can you
Ankur and JuhiGarg, Diva Jyote Portfolios, New Delhi


Ankur and Juhi take us through a fascinating journey over the last 7-8 years, where they successfully changed their game and saw significant success by embracing the BIG opportunity that retail debt funds offer. What's remarkable about this journey is how they managed to side step some of the pitfalls that the rate cycle throws at us, by staying sharply focussed on what really their clients were looking for, and ensuring that they offered solutions that actually met their clients' requirements. Read on to get rich insights on this game changing journey and consider how you would like to change your game, by focussing more on retail debt funds.

Debt products were offered by us, till 2005-06 mostly as an alternative to equity - if a client did not want to invest in equity (for various reasons ranging from being risky, unpredictable, to being a fraud system where stock prices were manipulated etc etc.), then debt products were offered. The debt alternatives to equity could be categorised into 2 segments - firstly were the products offered by the Government such as the 6.5% and 8% GOI/RBI Bonds, KVPs, post office deposits for senior citizens and the tax saving infra bonds &Sec 88 bonds. Secondly were the bond/income funds and MIP products offered by AMCs. However, there was no clear focus on creating a separate category for these debt products and they continued to be sold on the plank of being an alternative to equity. The same attitude was adopted by advisors/distributors and producers alike.

It was around the middle of 2006, when we were planning to take our advisory business to the next level did we start thinking about doing something that would differentiate us from other advisors/distributors. We started by asking ourselves a few basic questions -

  1. What do we do to increase our share of wallet with our existing customers and

  2. What do we offer to acquire new clients compared to other distributors

As a subset of Q1, a few more questions arose :

  1. Who was our competition? i.e. where were clients investing the rest of the money apart from what they were putting with us?

  2. Why were they investing in those products? i.e. what were those products offering which we were not or what could we offer to compete with them ?

A careful scrutiny of the client's financials revealed the very simple answer which was always there in front of our eyes - the money was either in their savings/current accounts or in Fixed Deposits.

Why was the money there? - a normal retail debt client does not understand the myriad world of finance and its complex jargon - G-sec yields, OMO, YTM, MTM etc etc. Theyhave a few simple requirements

  1. Their money should be safe

  2. They should earn a decent rate of return which is more or less known to him in the beginning

  3. They should get this return periodically - whether monthly/quarterly or annually.

  4. They should have access to the funds in case required in an emergency without any loss in the principal with maybe a lesser return than what the initial commitment was.

A combination of money lying in bank accounts and deposits fulfilled all the above requirements for the customer. Some of them also had the money lying there as they had no alternatives which they felt could fulfil all the above conditions. GOI bonds gave secured, fixed returns on a periodic basis but were not liquid and the money was locked in for 6 yrs at a low rate. Some of the clients were also unhappy with the money in the bank as it did not give them the option of earning a better return than what was being offered even if they wanted to and also that they had to pay a high tax on the return generated in the form of interest which finally led to the final returns being much lower than what they had envisaged in the beginning.

This was the point in time when we realised that this was the biggest opportunity waiting to be tapped - we simply had to find relevant options to replace the bank a/c and FD - if not completely, then at least partially to start with. Given the size of a client's investments with a bank, even if we managed to get a small portion of the same, our AUMs could multiply and at the same time generating better returns for the client. Our biggest competitor was not some other advisor or distributor - it was the money lying in banks !!!

A child does not start running from the moment it is born - it first learns to crawl, then take baby steps and then gets the confidence to walk and finally run. The same is with any investor - you do not throw complicated products and options at them in the beginning. You offer the simplest products first, get their comfort level up and then facilitatetheir entry into the league of advanced products.

Our Mission Statement was very simple - to convert clients from fixed deposits to debt funds by providing them additional returns of 150-200 bps on a post tax basis.With Juhi's CA background & expertise in taxation, we set out to analyse the various products being offered by AMCs and soon realised that one single product could not satisfy any of the requirements.

We started off with the FMP - the simplest product in those times which offered a fixed indicative return, liquidity, periodic returns and relative safety. Depending upon the time horizon, FMPs of varying tenure ranging from 1 month to 3 years were identified. To reduce the risk perception amongst the clients, we ensured that only FMPs with good quality papers were considered and consciously shied away from AMCs which offered abnormally higher returns (or payouts). Along with this, we also started selling the concept of liquid funds as an alternative to the funds lying in the savings/current a/cs. Amounts as low as Rs 1 lakh was moved out from FDs and put in FMPs.

Clients were still sceptical about these products but had faith in our advice and started with small amounts. It was, however, only at the time of filling the ITRs that these clients actually realised the gains they made. Compared to paying 20-30% on FD/Bank interest (depending upon which slab they fell in), when they saw tax free dividends and nil/negligible tax due to indexation, that they truly became converts and started committing higher amounts. FMPs gave them the return they wanted and liquid funds gave them the freedom to withdraw even the smallest amount at any point of time without losing any return.

In these 2 yrs from 2006-2008, we managed to covert quite a few customer to Debt and also used this concept as a selling tool to acquire new customers as not many advisors were actively advising on debt to the retail or the mid HNI segment (probably due to low earning potential).

The G-Sec crash of Jan 2009 shook the confidence of many debt investors (and advisors alike), but we ensured that barring a single client (who had insisted upon investing in this category) none of our clients lost any money as their funds were safely locked up in non-duration products like FMPs. Our decision to not take duration calls continues till this day as we always remember and abide by the golden rule of debt investing - "retail debt clients do not understand how one can lose the principal amount - they are interested in higher returns but not at the expense of losing their principal ". It is difficult to justify to a client why the final return was lower than the initial indicative return ... just try to convince them on how they got less than what they had invested !!!

As our understanding of the debt market and client psyche grew, we added more products to the basket which we were offering. Debt products offering the accrual story became a key addition, especially after FMPs lost some shine due to the ban on disclosing their yields.

Most of our clients who had started off with investment of a few lakhs have now shifted almost 70-80% of their Banking funds (in some cases running into crores) into various Debt products. Barring a couple of exceptions, almost all of our clients have consistently got better returns from debt investments than what they would have got from investing in banking options in the last 6-7 years.

In the last couple of years, we have started selling Debt as a savings tool rather than only for generating better returns. You want to buy a car/house after 2 years, start a SIP in a liquid or short term fund to save for a higher down payment so that interest burden can be reduced on the loan to be taken. You are a self employed professional who does not have a forced saving option like the Employee Provident Fund - start a SIP in a debt fund to save money just like you would have done if you were in a job. You have money lying in your bank a/c after your salary gets credited (which invariably will get spent during the weekend in the mall), start a SIP in a liquid fund - it is simply putting money from one pocket to another with the difference being that the other pocket is zipped up and not visible to you on a daily basis. These are some of the examples we used to inculcate the habit of saving via a SIP in debt funds.

Debt can also be a game changer for Advisors in 2 ways - Firstly, it can be an all weather friend which you can sell to your clients 365 days a year. Equity investing is, unfortunately, done by tracking the sensex movement - higher the sensex, more the investment and vice versa and hence the advisor is always at the mercy of the sensex. Unfortunately, debt has also started being sold on the basis of the G-Sec rate. We track neither the sensex nor the G-Sec rate on a daily basis -but invest in debt for our clients by simply looking at their risk appetite and time horizon and believe me, you will be surprised that you will be able to find a suitable product which fits into the client requirement at any time of the year - irrespective of where the G-Sec rate is, irrespective of what open market operations the RBI is doing and so on.

Secondly, retail debt investing can also enable advisors to charge advisory fees from their clients. If you are able to get the client something more than what he was getting earlier, no client will be averse to sharing some of those gains with you. Equity investing has, unfortunately, become a commoditised product which is available off the shelf whereby clients are picking out their own Top 10 list from various websites. However debt investing is slightly different since most of the clients are not aware of the various concepts and products available and therein lies the opportunity for us to act as advisors and be able to charge fees for the same.

The future holds great promise in the debt investing space but we have to be on our toes to take on new challenges. With the DDT being increased, some of the tax arbitrage, especially on the short term investments, has been reduced thereby shaving off some return from these products. Thus, product innovation is the need of the hour. The ATM card concept launched by some AMCs like Reliance, is a step in the right direction. Meanwhile, just keep on fitting the right combination of products into the client requirements and you will never go wrong with Debt.

Opening Bat Cash flow All Weather Fund Inflation Buster

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