Think Debt : Advisor Perspectives 02nd January 2015
For retail distributors, debt can be riskier than equity
Ashish & Manish Goel, Vista Wealth, Delhi

imgbd Think Debt is a joint initiative between ICICI Prudential MF and Wealth Forum, which aims at sharing new thoughts and new paradigms to help the industry make deeper inroads into the large pool of conservative retail savings that offers a huge growth opportunity for the retail debt segment of the MF business.

We open the innings of the Advisor Perspectives series within Think Debt with insights from Ashish and Manish Goel of Vista Wealth, Delhi. Vista Wealth has received Wealth Forum awards for highest growth in retail folios pan India as well as highest growth in retail debt folios, pan-India, in the IFA segment. You can therefore say that Ashish and Manish Goel are perhaps among the best qualified in the business to share their perspectives on how to build a retail debt book. Ashish draws on his rich experience and expertise in the retail debt business to articulate what you need to do and importantly what you should not do, in order to successfully scale up your business by effectively leveraging debt funds. Read on to understand why Ashish says that debt can be riskier than equities for retail distributors, and how you can still grow your AuM 10x if you take simple steps to avoid pitfalls in this journey.

If we at Vista Wealth are today in a position to contribute our experiences with retail debt funds, if we are seen as successful distributors in this product segment, I think we owe a big thanks first to DFDA - and Mr. Gurpreet Singh in particular, and to Franklin Templeton - both of whom nudged us to seriously take up retail debt funds very early. Gurpreetji has taken personal pains to showcase to all DFDA members the business opportunity and client benefits of focusing on retail debt funds. We took the cue from him and built a sizeable retail book over the years. In this journey, there are many insights we imbibed - some from our own experiences and some from constant interactions within DFDA members, which I am sharing with my fellow distributors here on Wealth Forum.

The investor's perspective

Let's understand what a typical retail investor looks for when he considers debt funds. We have a large number of retail clients who invest in debt funds through us, and in addition to the normal engagement with them, we also asked specific questions on what they expect when they invest in debt funds. Two points came out very clearly:

  1. When considering debt funds as an alternative to bank FDs, their return expectations are not high. If a bank FD gives them 9%, they are happy if the debt fund matches the same 9% return - the benefit will accrue to them through lower taxes. They are not really looking for much higher returns pre-tax from this "safe" segment of their portfolio.

  2. Because this allocation comes from the "safe" segment of their portfolio, there is zero tolerance for volatility. Stability, in other words, is far more important than higher returns, when considering debt funds.

The retail distributor's perspective

There are a few things we need to keep in mind about investor behaviour (in addition to the 2 points mentioned above), which I think are critical in deciding our retail debt strategy.

  1. Allocations of a typical retail investor to debt / fixed income products are much larger than allocations to equity. When clients get comfortable with debt funds, the same people who gave you 100,000 and 250,000 rupees for equity funds, will give you 800,000 and 10,00,000 rupees for debt funds.

  2. In addition to the point of zero tolerance towards volatility on debt funds, an equally important, perhaps more important point for a distributor to understand is that there is zero room for us to make a mistake in debt. Retail clients understand that equity markets are volatile, and may not blame you personally for corrections. But, if a debt funds goes into negative return territory, a typical retail investor will certainly blame you for misguiding him - and this can often jeopardize the relationship.

  3. High returns on debt funds are actually a huge problem for distributors. When you see a debt fund delivering a 15% annualized return, and this return is aggressively marketed, many retail investors raise their return expectations from debt funds and often are tempted to chase recent performance - without fully understanding the difference between a duration and an accrual strategy, without fully appreciating that this 15% return comes with high risk of volatility - which they cannot tolerate, and without fully appreciating that this performance may most likely not be repeated

I am not trying to be an alarmist here - I am convinced that retail debt is a huge opportunity for mutual fund distributors. We at Vista Wealth have benefited tremendously, as have our clients, due to our sharp focus on this segment. But, to effectively harness this business opportunity, all I am saying is that you need to understand clearly where our investors are coming from, and shape your strategy accordingly.

Here is a table that summarizes Vista Wealth's approach to different debt fund products:


The table gives you the criteria which we use to evaluate any debt product category. The first is the nature of returns - are returns stable or uncertain. The second parameter is product suitability - for what purpose is this product most suitable in a client's portfolio. Is it a good intro product - the first product you will offer to a new customer or to a first time mutual fund investor? Is it on the other hand a product meant only for experienced, savvy investors? Or is it a product for all investors?

Then comes what's in it for us : is the brokerage structure reasonable or does it make the product unviable for us? And finally, is the nature of the product such that it can be part of the long term strategic asset allocation for a client or is it only a flavor of the season, tactical product. The last column - which is the result column, gives you a shortlist of which products we find ok and which we don't - and the reasons will be clear by going through the parameters for each product.

Do's and Don'ts in the retail debt business

Based on our experience of selling debt funds to retail investors over the years, we have come up with a list of Do's and Don'ts that guide our teams when they engage with our clients. Here is our set of Do's and Don'ts - with the Don'ts coming up first.



Don't over-commit returns : Most retail clients don't have huge returns expectations from debt. If you over commit returns, you will needlessly create dis-satisfaction down the road.

Don't mismatch time horizon : Be sure to recommend only products that are suitable to the time horizon indicated by the client. 6 month money should never go into even moderately aggressive debt funds, however sure you may be of yields falling in the next 6 months. Have a clear chart which shows you which products you will recommend for different time horizons, and stick to that.

Don't expect full allocation at the outset : Retail clients have sizeable amounts in bank FDs, but will rarely give you all of it in one go. Have the patience to allow them to test the waters with small allocations, gain confidence and then gradually allocate larger amounts into debt funds. If you start aggressively seeking higher debt allocations, clients often get jittery - we need to remember this is their "safety" money. We may think we are doing the right thing by asking them to move it to more attractive avenues, but we must understand that they will do it at their own pace. I am seeing many of my clients today unhesitatingly breaking FDs and moving money into accrual funds recommended by us - but I understand that it is happening today - not 3 years ago, when I may have first introduced them to accrual funds.

Don't be aggressive in your product selection : This is absolutely critical. A typical retail investor is seeking moderate returns with no volatility. However strong is a duration call from all fund managers, think twice before recommending a duration fund to a retail investor - as most retail investors do not have appetite for volatility in debt funds. We stick to accrual funds and we go out of our way to explain to our clients why we think duration funds are not suitable for them. It took our distribution fraternity several years and a couple of market crashes and meltdowns in tech and then in infra to understand that sector funds in equity are not suitable for retail investors, and to appreciate that diversified equity funds are the best bet for their equity allocations. I hope it does not take us so long to understand that duration funds are good for experienced savvy investors only and are best avoided for retail investors.


Start small : Make it a point to advise clients to start small. There will be little resistance to a small initial allocation. It helps you put foot into the door. The process of weaning clients away from traditional fixed income products like bank FDs and RDs is very slow, but if you have the patience, it is a very rewarding experience - for you and your client.

Introduce liquid funds to ALL clients : The best way of helping clients understand and appreciate the operational aspects of funds is to get them into liquid funds, and go through one or two rounds of redemptions. Once clients see a full operational cycle - upto getting their money back and a statement that shows them how much they made - their confidence in mutual funds will increase substantially. This confidence will then enable you to start a conversation on accrual funds.

Pitch SIPs aggressively : Most retail investors earn on a monthly basis, spend daily and save monthly. These monthly savings need to be parked in appropriate debt funds through SIPs rather than languishing in savings accounts and then being invested as a lumpsum. We have seen small debt SIPs becoming much larger over a 2-3 year timeframe. A classic case was an interaction I had with a client recently. He started 2 years ago with an equity SIP of Rs.3,000. We worked on him and convinced him to start a debt SIP, also of Rs.3,000. His monthly savings were at that time around Rs.30,000. Over the next 18 months, he increased the debt SIP from Rs.3,000 to Rs.20,000. In the last 2 years, his Rs.3000 SIP also has done well for him. He recently told us to recast his SIPs to Rs.15,000 each in debt and equity. The point is that we now have SIPs that cover his entire monthly savings - but we started small and allowed the client to first get comfortable with the experience, before seeking higher allocations.

Explain duration vs. accrual : There is a lot of promotion of duration strategies and retail investors, as mentioned earlier, will get very interested when someone tells them that they can earn 15% from Government securities funds. Whenever a client calls us with such queries, we never give brief answers over the phone. We seek a meeting, where we explain in detail accrual vs. duration, and the upsides and downsides of both strategies. I have found that it often takes 2-3 meetings to help them clearly understand why we strongly advise them to stay away from duration strategies and why we think the stability of an accrual fund is better than the promise of higher returns from a duration fund. This investment of time, we think, is critical to help them stay on course, to help them avoid blunders which can leave a bad impression in their minds about mutual funds as a category.

Explain taxation clearly - in writing : Taxation of mutual funds is not a subject every retail investor is familiar with. Income tax provisions on indexation of capital gains is not an area of familiarity for most. We have found that merely explaining these concepts is not enough because clients may nod that they have understood, but may not have fully understood how the taxation of mutual funds actually works. We therefore insist on giving a written note with clear examples, which they can take back with them after our discussions. This helps them read it at their own convenience and then revert with questions, if any. Giving them that comfort on the taxation factor is a big business driver - when they understand how the tax benefits really accrue to them in mutual funds and how they don't get the same in bank FDs, they are much more inclined to invest in the smarter choice - especially as they now know exactly why and how it is smarter.

To conclude

This list of do's and don'ts and our product matrix has helped us serve our clients well with respect to their debt allocations. I hope some, if not all of these points, will help you in your efforts to scale up your business by fully leveraging the potential of debt funds. There is huge potential in debt funds which can help you grow your AuM by 10 times. We are not talking about doubling - we are talking about a 10x growth in AuM! Let's together reach out to all Fixed Deposit investors and get our deserving share from them!

Share this article