Wait
for the tide to turn!
Typically during a crisis in the financial markets it is presumed that stocks are being returned to the rightful owners. In simple terms, shares move from weaker hands to stronger hands and hence they are called rightful owners who can stomach volatility and understand the business prospects of the company and its future earnings potential. This is true in all aspects of business and you can see that in the mutual fund industry as well.
I joined the mutual fund industry in 1998 when technology boom was just starting and we had to solicit business for mutual funds. You had to convince a client for doing a SIP for Rs. 1,000 and mutual funds had to be sold not bought (This has not changed even today). A year later, clients were rushing towards agents (that’s the term which was prevalent then) to invest in technology funds which had anything and everything under the sun in their portfolios. Agents/brokers were very happy because business was booming and there was no push required. Year 2000 dawned and we had the bust in technology stocks. Things were relatively easy then because people changed distributors under the pretext that lot of wrong selling happened.
History repeats itself and the year 2007-2008 saw a slew of NFOs which were bunched under the infrastructure theme. Again distributors/agents (some were now financial consultants) had people queuing up for investing in these funds. Selling was very easy and there was demand all across. Post the Lehman AIG crisis and the credit market freeze, markets crashed the world over and our markets also slipped by more than 50%. There was again a rush to get out of these funds and get in to fixed deposits by cursing agent for selling a wrong fund.
SEBI abolished entry loads and people appreciated the regulator’s move. After few years, direct option became mandatory and mutual funds started having different NAV’s and expense ratios for the two plans.
I have a lot of friends who are doctors and they really hate it when I call them for some ailment and tell them that I had taken these tablets. Doctors don’t appreciate self-medication and rightly so because you need professional guidance.
Coming back to the topic of funds, direct plans are supposed to be for educated and well versed investors, who can stomach volatility and digest losses, if any. I would just like to remind everybody that after the launch direct plans there has been no financial crisis or meltdown and hence investors are very happy about it. Imagine the decline in bond funds and gilt funds NAV if interest rates move up after you have invested. Imagine a stock market correction after you have invested. It’s not about at what price you bought or what return you got but what to do about the investment at that moment which is a critical decision. This is when the client actually needs hand holding and this is where a distributor comes into picture.
Imagine a client in a situation where he/she was invested in a fund which has declined and the client is staring at a loss in the portfolio. Do you think people at AMC call centers have the wherewithal to answer investor’s queries? This is where I feel the client needs the distributor. As a consumer we end up buying a lot of things (imagine funds) which we don’t need because they are cheap! The distributor actually helps in deciding what is required and what’s not.
So coming back to the point of rightful owners in case of a stock market I feel after a financial crisis, 50-80% of your clients will come back to you. So don’t worry about direct plans, instead direct your attention to clients who value your service.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.