Think BIG 12th February 2013
A great alternative to 5 year bank FDs
Hemant Rustagi, WiseInvest Advisors, Mumbai


Hemant Rustagi - one of Mumbai's largest and fastest growing advisors, and among the most high profile advisors in the media circuit - shares with us what he sees as a BIG opportunity for advisors. He strongly believes that any investor who parks money in 5 year long term FDs must seriously consider MIPs. But, the crucial aspect is the way in which advisors position this product. Read on as Hemant shares his insights on how NOT to position MIPs and how to correctly position them, if you really want to tap into the BIG opportunity that awaits you.

Who do we recommend MIPs to

We recommend MIPs to clients who we think will benefit from a small equity exposure, but who are wary about market volatility. The key factor however is to have a sufficiently long time horizon of 5 years.

We recommend MIPs to first time MF investors who we think need a limited equity exposure in their overall portfolio. Again, time horizon is the key determinant. If the client has less than a 5 year horizon, we stay away from MIPs or for that matter any products that have an equity component. If, on the other hand, the client has a genuinely long term horizon - of clearly upwards of 10 years, we encourage them to look at a higher equity exposure than what an MIP offers. If there is still some apprehension, we get them started on their equity journey through MIPs in the first instance. We strongly prefer investing in MIPs through the growth option.

We are not comfortable recommending MIPs as a regular income source for clients whose main monthly income source is supposed to accrue from these investments. We are however happy to recommend MIPs as an additional income source even for retired investors, where we see that pension and other sources of income like rentals are sufficient to cover monthly expenses.

How do we position MIPs

This is really the most important aspect. We never get into a product specific conversation on a stand alone basis. We always show how an MIP or for that matter any product, fits into the overall plan that we have agreed with the client.

If you get into a product oriented relationship, your product's performance gets reviewed by your client as and when he thinks necessary. MIPs are not as stable as traditional fixed income products - we all know that. But, if a client has switched from a fixed deposit to an MIP because he believed that returns over the next 1-2 years are likely to be good, you are setting yourself up to answer things that are beyond your control. My strong advice is not to pitch MIPs as a great product because the current view on equity and debt may be good. The moment you give a current view, you are implicitly getting your client into short term thinking - where he will keep tracking performance on a quarter on quarter basis.

We strongly believe that MIPs are better than traditional fixed income products for any investor - whether he is a tax payer or not - provided he has a 5 year horizon. For tax payers, the tax efficiency of MIPs gives a big post tax advantage apart from the blended asset allocation, which yields higher returns over a 5 year period. For non tax payers, the blended asset allocation itself can give them superior returns over a traditional fixed income product.

Typical concerns and how we try to handle them

Concerns for a first time investor in MIPs would normally be around volatility and non-guaranteed returns, as they have experienced traditional fixed income products - which give stability. The key here, to reiterate again, is to ensure two things :

    - Recommend MIPs only to clients who have a 5 year horizon.

    - Show your clients where MIPs fit into their overall plan.

The reason for this is simple. We know that given a 5 year horizon, MIPs will deliver superior pre and post tax returns as compared to traditional fixed income products. It is the interim volatility that makes investors nervous. The way to deal with this interim volatility is therefore to agree upfront that this is an investment avenue for a 5 year horizon and that you would not recommend this fund if the investor had only a 2-3 year horizon. That prepares the client to handle volatility, even before he has made the investment. Secondly, when you are recommending products within an overall plan, you evaluate progress vs plan and focus less on quarterly performance of each scheme within the plan. This allows products to go through the inevitable volatile periods and emerge with healthy performance, over the time horizon you have chosen them for.

The opportunity

I believe any investor who invests in 5 year bank deposits must seriously consider MIPs. If he has a 5 year horizon when he places his FD, he clearly has the right time horizon to look at MIPs. I have seen clients of mine who invested in MIPs 6 years ago, by pulling out of their PPFs. Now, in these 6 years, we have seen everything that the market can show us - we have seen a big bull market, the biggest bear market and years of a range bound and choppy market. Despite all these movements, today, when these clients see their portfolios, they are very happy to observe an 11% annualised return pre-tax and significant tax efficiencies that come as a result of the MF structure of the product. Show me a traditional fixed income product that can match these returns on a pre or post tax basis. This is what I show my clients. This is the opportunity for any advisor who sees clients wanting to invest in 5 year FDs. If in the last 5-6 years, which have been the most challenging in recent times, MIPs have still managed to deliver to the expectation of beating deposits and inflation, shouldn't we be confidently recommending MIPs to all investors who park their money in long term FDs?

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