Listen to this article
Passive funds are not only the latest flavor of the season in the world of investment but also the future of it. Globally, passive investments constitute a significant chunk of the mutual fund pie. In India too, the share of passives in the mutual fund industry AUM has been increasing significantly. It is hence important for MFDs to know the art of pitching and selling passives.
Nishant Patnaik, Associate Editor, Cafemutual gave some tips on the art of selling passive funds at the recently concluded Cafemutual Passives Conference (CPC) 2024. Here are the key highlights of the session:
Why are passives important?
The AUM of passives has been growing very rapidly. It has grown by 85% in the last two years and 38% in the last one year. As of March 2024, passives form 17% of the total MF AUM. Individual investors constitute 24% of the total assets of passives and 17% of total folios (2.80 crore).
Roadblocks while selling passives
The biggest roadblock for an MFD is the low margin. However, index funds offer healthy commission. Many mid cap index funds, sectoral index funds and small cap index have distributable TER of more than 0.60%. Even large cap index funds and gold FoFs have the average distributable TER of 0.40%.
While MFDs do not get any commission from ETFs, these products can give MFDs a chance to enter clients balance sheet and increase the wallet share.
Here are some tips to sell passive funds
Don’t compare active and passives: The biggest mistake MFDs do is comparing actives and passives to sell passive funds. Every fund has its own strengths. It is important for MFD to make their clients understand that passives also have their own advantages like low TER and can be used with actives to diversify the risk in an investor portfolio.
Give global perspective: MFDs should keep the bigger global picture in mind. Passives take up 51% of the MF AUM in the USA and 27% of it in UK and Europe. This can help MFDs convince clients to allocate a part of their portfolio to passives.
Focus on overarching theme: MFDs should talk about the broader picture to sell passive funds. For example, a NIFTY 100 index fund can be pitched as an opportunity to invest in the 100 big companies driving the engine of India’s growth.
Make different pitch for different clients: Passives have benefits for all kinds of investors. It can be pitched as a cost-effective option for investors worried about cost. It can also be pitched as a less risky version of actives or a low volatility product.
Go for smart beta to offer uniqueness: MFDs can also give an edge to their client’s portfolio through smart beta funds. Smart beta funds have various factors to suit investor’s requirements like momentum, alpha, low volatility, value, quality and liquidity.
Take tactical calls: So far, MFDs focus on long term investment approach to do business. However, investors expect some tactical allocation to accelerate the growth of investment portfolio. Passives allow MFDs to take tactical calls on their client’s portfolio to take advantage of the latest trends in the market. For instance, if you think that the RBI will decrease the interest rates, you may recommend buying a bank index to clients to benefit from this short term event.
You can watch the full video by clicking here.
