WF: What prompted you to become an advisor? How did you differentiate yourself in a highly competitive market like Mumbai? What has helped you achieve such stupendous success in the 5 years since you set up your firm?

Hemant: Let me give you a brief background of when we started to give you some perspective. I have spent around 18 years in this mutual funds industry. And I always thought that the clients were not getting what they deserve to get in terms of advice. I have always believed that mutual fund is one instrument that has benefited investors the world over; however in India, investors were not getting the true benefits of that. There is couple of reasons for that :

       (1) The first is that if you look at building wealth over time, equity is the asset class which you have to rely on. But, most of the investors were looking at              equity primarily as a short term vehicle to make quick money.

       (2) The way mutual funds were being positioned especially after when the industry was thrown open to the private sector players was incorrect. The industry              did not create a distribution network - but relied on existing distribution infrastructure that sold IPOs, company FDs etc. Somehow, mutual funds also got              positioned like IPOs. I think there was a gap between what the client was expecting from mutual funds and what mutual funds could deliver. So I thought              that there was a gap there and what was needed was to change the minds of investors to look at equity as a long term instrument to build wealth and              capital - rather than looking at an option where you can get rich overnight.

So that was the background. I had a fairly a good idea - having been on the other side of the story in the MF industry - to understand where was the gap in terms of products, gap in terms of expectations. With that background, I started my firm in 2004.

I was very clear from the outset that the key factors for success as an advisor would be 3 things - the quality of advice, understanding of the products and a disciplined investment process.

Quality of advice can can happen only if you understand the investments properly. You need to understand what these products offer and also you need to understand the needs of investors. If you are able to match these two then only you are able to deliver or offer the right kind of product. I am very clear about this - that the key has to be the quality of advice and understanding of products.

Third like I said look at it not as one off investment - look at it as a process. Don't give one-off suggestions every time a client has say Rs. 10,000 to invest or Rs. 15,000 to invest. I always encourage investors to plan their investments. Not necessary always in terms of asset allocation. Just some discipline in terms of how to start the investment process.

In India if you see, the penetration of equity fund and equity is so low even today. I think one of the reasons for that is because of the fact that people look at it from a short term point of view and get impacted by market cycles.

In every market cycle, you see a set of investors getting disillusioned by equity and equity funds and getting out. There are lots of people who have experienced equity funds - but not stayed on. They moved on because of a bad market experience - and don't stay invested to get the true benefits of wealth creation that equity can and has delivered over time. So, my focus has been on attempting to change mind sets of investors in whatever limited way I can and in whatever we do.

-      The other aspect of the investment process is about the kind of funds we recommend. I am a strong believer having been part of the industry - that not every new fund will suit every investor. For example :

In the last five years that we have been operating, I don't think we would have recommended more than 4 or 5 NFO's. We have not touched any other NFO.

-     We never looked at close ended funds as a part of the portfolio. For example except ELSS, where you have a mandatory lock in period, or FMP's, we may have at most looked at one or two equity closed ended funds. None of our clients will have a close ended fund, none of our clients would have NFO's.

We have always focused on well diversified, vanilla kind of equity funds with a solid track record. The biggest challenge is the mindset of clients that low NAV is cheap - but, it is important to stick with your basic principles and beliefs.

WF: Wouldn't it have been difficult to stick with this philosophy when many of your competitors were recommending flavours of the season kind of funds - and your recommendations looked "boring" in comparison?

Hemant: It was very challenging but I was very clear in my mind if I have come out of the industry and looked at becoming an advisor, I can't be doing what everyone is doing. So it was challenging no doubt about it. But y0u need to create your own niche. You need to have your own thinking. I have been writing a lot of articles to keep stressing the value of keeping things simple. And frankly, when all the negative press started on mis-selling NFOs and closed-ended funds because of high commissions etc, our clients looked at the portfolios and understood that we were never a party to all this stuff that was happening around us. That helped us a lot.

I believe that as an advisory firm, while we might listen to all the fund managers and all the experts in the market, unless and until we don't have our own view on the market, we are not doing justice. We are not working as postmen here - listening to a fund manager and communicating his views to our clients.

If you start doing what everyone is doing then you are no different - then survival becomes difficult. In this profession, I believe apart from knowledge, you require a lot of passion. You need to have passion, you need to feel for somebody's money. As long as your focus in on that, you can meet any challenge.

Through my writing, through my seminars, we try to convey to people about what is right for them and how to grow wealth using mutual funds over a long period of time.

In this profession, like perhaps many others, profitability will take the shape of a hockey stick. There will be an initial period of struggle, profits will dip in the initial years as we invest in the business, but eventually, like a hockey stick, after the gestation period, revenues and profits will rise rapidly. If you understand that, if you believe in that, you will ignore the competition.

When we started, we also started with a network of marketing partner or sub agents but within 6 months I changed my model completely. I realized that with your own team, it might take time but its important that all your team members and people who represent your firm understand, share and believe in your core philosophy.

WF: How large has your business grown in these 5 years and which are the client segments you focus on?

Hemant: I focus more on the quality of assets that we have rather than only on AuM - but, to answer your question, our AuM should be around Rs. 350 crores now.

In terms of client segments, we cater to HNI as well as retail clients. I believe that their needs and requirements are completely different, so we have different teams for both these segments because even the guys who are part of these teams have different mind sets. A retail investor needs lot of hand holding. Our team member has to be very patient with those people. Retail clients will be the main stay in our industry in future - even if their AuM today may not be as large and attractive as the HNI segment.

Our focus is a little larger on the HNI segment. Planning for these clients has to be very different, their needs are different and they are also more experienced with investments.

WF: What changes have you made in your business model since Aug 09, to combat the fall in margins as a result of the entry load ban?

Hemant: It has put on strain on the bottom line - there is no doubt about it. Income levels have gone down by at least one third. We need to come up with strategies that help us survive without compromising the interest of the clients.

I feel the move has positives and it has negatives - but the regulator should have given time; they should have done it in a phased manner.

I believe that time has come for the investors to realize value that comes with the advice, the price that has to come with the advice. To change that mind set is not easy, I think somewhere you need to make a beginning.

WF: Have you considered a fee based approach in your business?

Hemant: We are in the process of doing that, I did not want to do it overnight. Also it depends clearly on each portfolio size. If you look at an HNI portfolio and going by the current practice where you get some upfront and some trail which has been capped around 1.25%, I think the remuneration is not bad. You have to understand that the level of effort you are putting into managing and reviewing a portfolio does not go up proportionately with portfolio size. If a client has a 5 crore portfolio and you are earning 5 lakhs on it, how much more do you want to earn? How much are you going to charge him and for what?

For portfolio monitoring, whether it is a 50,000 portfolio or a 5 crore portfolio, it takes the same time. Because we don't have hundreds of funds to track - we have only 10 - 15 funds that we recommend. Our approach is also that if we don't like a fund, that fund has to get off all portfolios - whether it is retail or HNI. My point is it is not something that requires a special effort.

Our problem is in the retail side, our compensation is not commensurate with the effort we are putting in, after the entry loads were banned. There is a case in my view to charge an advisory fee for retail clients - purely from the point of view of the efforts we put into managing their portfolios.

The issue is that retail clients need to be mentally prepared for this. The challenge here is - I meet a retail guy and tell him, boss why don't you try mutual funds. He says okay, tell me what it is. I say this is what mutual fund is, this is what we can do for you. Then he says, fine, I will go with it. And before he does that, I say, okay I am going to charge you 1% on that. The point is he has not seen the quality of advice that I give, he has not seen what difference mutual funds are going to make to his portfolio - how is he going to agree instantly to pay a fee for advice?

I strongly believe that we need to show patience with these people and say okay, experience it first. We should make it clear upfront that there will be a fee, but charge the fee once he's had an experience of mutual funds. There is always a risk that somebody can a take advice for one year and go away elsewhere or take the advice and planning from you and put it somewhere else. But that risk of a few clients behaving unethically should not deter you from doing what is right and practical. We have one of the highest savings rates in the world, there are huge number of investors who need good advice - we would rather focus on that and recognize that some will not treat us fairly - but most will, if we do what is right for them.

I am very much in favour of establishing a fee based model - only that we need to give time to retail clients to adapt to it.

WF: Do you think the new BSE and NSE MF platforms are going to become very popular among distributors and investors?

Hemant: I am not bullish on these BSE / NSE platforms. I think there is a very clear need for mutual fund platforms - but BSE/NSE is not the answer.

Mutual funds are a product category that are either not understood or mis-understood. So this is a product this requires a push, the push can be very aggressive the push can be a certain rate, on each advisor strategy or the industry strategy.

How many brokers are India are willing to service retail client with long term investment avenues like MFs? An equity client of a broker churns his 5 lakh portfolio a few times each year when trading stocks. The same 5 lakhs if put into an equity MF, the client may not show his face again to the broker for another couple of years. How many brokers are going to give proper advice to retail clients that MFs are instruments that help create long term wealth?

I feel that platforms are required to improves the efficiency - there is no doubt in mind about that. But whether BSE/NSE platform is the right answer to that, I don't think so. The only benefit is that this platform will give the MF industry tremendous reach beyond the 200-300 centres it has reached with the R&T network.

What we need is something that eases operations hassles and improves the fund remittance process. Any platform that offers that will be useful for advisors to consider. I am looking forward to the day when I can move client's money from a fund administered by CAMS to another administered by Karvy - without money physically coming back into the client's bank account and then going back into another fund. That, according to me, is efficiency.

WF: Finally Hemant, what are you telling your clients now? Are they worried about the recent volatility?

Hemant: We follow a very simple funda : it is practically impossible to predict the short term movements. What we always advice is there are two risks : one is the inflation risk and the second is the capital risk. The capital risk is for the short term. For the long term investor you need to worry about only inflation risk. Because any instrument whether it is equity or something else, if you have invested for 5 years or 10 years, I don't think anybody has lost money.

So what we tell them is that your time horizon speaks for itself in deciding where the money should go. For example long term money if it goes for liquid plus fund you are a loser. Short term money if it goes to a equity fund you are a loser, so look at basically what your objectives are and what is your time horizon and that gives you a very clear solution as where the money should go.

If you are putting money into equity for a 10 year period based on the growth prospects, and then you start worrying about weekly FII flows in and out, you are contradicting your own beliefs. There will always be short term views that others may take, there will be hiccups because of politicians - these don't matter so long as you believe that this is an economy this is doing very well and will continue to do so for the next several years.

One big debate among investors is whether SIP is better or lumpsum. I think it is a combination of both. The reason being that in a rising market, SIP underperforms while in a volatile market, it is a better option. And the market never does only one thing, it never always goes only in one direction. So you need to have both. Now, if you as an investor do not have the lump sum to invest, you have no other option but to look at SIP, but if you are an investor who can spare some money for long term investment do a bit of both.

You can't depend on the events to decide your investments. If you look at elections, everyone was expecting that after elections, you are going to see the market in complete chaos. But it went the other way. I think timing the market based on an event can backfire badly.

The other thing I tell clients is not to get too aggressive with their starting amounts in SIPs. If I am 35 years old and somebody said you are 35 and you have not done anything, okay I want to start with a monthly SIP of Rs.10,000. 3 months down the line, my home budget has gone haywire so the first thing I do is stop the SIP. So don't be very aggressive in terms of starting SIP. See how it affects your budget and once you fell comfortable carry on with that. Increase your SIP amount with every increase in your income. Never look at aggressive or what we call as the flavor of the month kind of funds. Go for funds which are well diversified and have a bias towards large caps.

I believe that the principles of investments are quit simple, we can make it appear very complicated. What is required is discipline and from the advisor's point of view, sincerity and passion for this profession. Advisor and client should take collective responsibility for the portfolio's performance - blame game gets you nowhere. Any finally, as advisors, we need to be transparent and accessible at all times - irrespective of whether we are going through good or bad times. Always be in touch with the client. Its in the bad times that he needs you the most.