For some time now, it is a common sight to find AMCs use miscellaneous means to increase their investor/asset base. By miscellaneous, we mean all methods and ‘schemes’ unrelated to performance/track record. Ideally, an AMC should not have to talk beyond its track record over various market cycles to make investors aware of what they can gain by investing in the AMC’s funds. Unfortunately, either because their track records weren’t impressive enough or because they weren’t able to communicate their performance effectively, AMCs have had to resort to other means to draw investors.
Of course, not all AMCs use such marketing schemes; certain AMCs have told us that they would have preferred to keep an arm’s length from these tactics, but their hand was forced by other AMCs. The bottom line is that investors/agents are regularly bombarded with rewards/incentives by AMCs and core factors like the fund’s investment proposition and track record are conveniently pushed to the background.
Listed below some of the most popular carrots dangled by AMCs to their investors/agents:
1) Waiver of entry load
This is the most common trick in the AMC’s marketing manual. AMCs usually have a marketing plan to mobilise assets in a particular mutual fund scheme. The easiest way to elicit interest in that scheme is to give investors an ‘entry load waiver’. This means that for investments made over a specified time period, investors will not incur an entry load (which is usually used towards the agent’s commission); so his entire money is invested in the scheme.
The entry load is waived off either on SIPs (systematic investment plans) or lumpsum investments. Until some time ago, it was usual for most AMCs to waive entry loads on SIPs. It took a few AMCs to start this trend and sure enough other AMCs followed suit. The principle advanced by AMCs for waiving off entry loads was to encourage mutual fund investing and financial planning. Over time the entry load waiver had garnered considerable assets for AMCs. On the flipside, the waiver was proving to be an expensive proposition (since in such a scenario, AMCs had to pay commissions from their own pockets); so they reversed the trend of waiving off entry loads.
2) Star fund manger
Another marketing ploy that usually does the trick with gullible investors is the ‘Star fund manager’ carrot. Most AMCs when they have a track record are happy to project it to investors. Some times, AMCs take the easy way out; more than their track record they like to talk about their Star fund manager and his past exploits. The message for investors is clear – invest in the AMC’s funds and benefit from the expertise of the Star fund manager.
3) Bundling other services/products
AMCs are quick to identify opportunities that could be potential areas of interest to their investors. And for most investors, getting insurance (health/life/child) is very important. Many AMCs bundle insurance with their offerings and are happy to make that a talking point rather than the scheme itself. While some of these features may be innovative, they nonetheless detract from the scheme and its performance, which should be the talking point, rather than the add-on benefit.
4) Incentives for mutual agents
You would have noticed that the persuasive tactics we have discussed so far are aimed at the investor. AMCs also employ indirect means to woo the investor. These indirect means use the agent as leverage. So the AMC woos the agent, who in turn pitches the AMC’s schemes to the investor. Some of the more common agent incentives include higher commissions on specific schemes or on specific targets or on specific initiatives (like getting US64 bondholders to invest the redemption proceeds of their investments in mutual fund schemes from the parent AMC). Of course, everyone knows about the offsite ‘training’ meets arranged for select agents in the most exotic locations.
In conclusion, there are a lot of distractions for investors looking to make an unbiased and informed investment decision. As always, our advice to investors is to ignore the persuasive tactics and invest in mutual funds based on track records over the long-term and across market cycles.
Of course, not all AMCs use such marketing schemes; certain AMCs have told us that they would have preferred to keep an arm’s length from these tactics, but their hand was forced by other AMCs. The bottom line is that investors/agents are regularly bombarded with rewards/incentives by AMCs and core factors like the fund’s investment proposition and track record are conveniently pushed to the background.
Listed below some of the most popular carrots dangled by AMCs to their investors/agents:
1) Waiver of entry load
This is the most common trick in the AMC’s marketing manual. AMCs usually have a marketing plan to mobilise assets in a particular mutual fund scheme. The easiest way to elicit interest in that scheme is to give investors an ‘entry load waiver’. This means that for investments made over a specified time period, investors will not incur an entry load (which is usually used towards the agent’s commission); so his entire money is invested in the scheme.
The entry load is waived off either on SIPs (systematic investment plans) or lumpsum investments. Until some time ago, it was usual for most AMCs to waive entry loads on SIPs. It took a few AMCs to start this trend and sure enough other AMCs followed suit. The principle advanced by AMCs for waiving off entry loads was to encourage mutual fund investing and financial planning. Over time the entry load waiver had garnered considerable assets for AMCs. On the flipside, the waiver was proving to be an expensive proposition (since in such a scenario, AMCs had to pay commissions from their own pockets); so they reversed the trend of waiving off entry loads.
2) Star fund manger
Another marketing ploy that usually does the trick with gullible investors is the ‘Star fund manager’ carrot. Most AMCs when they have a track record are happy to project it to investors. Some times, AMCs take the easy way out; more than their track record they like to talk about their Star fund manager and his past exploits. The message for investors is clear – invest in the AMC’s funds and benefit from the expertise of the Star fund manager.
3) Bundling other services/products
AMCs are quick to identify opportunities that could be potential areas of interest to their investors. And for most investors, getting insurance (health/life/child) is very important. Many AMCs bundle insurance with their offerings and are happy to make that a talking point rather than the scheme itself. While some of these features may be innovative, they nonetheless detract from the scheme and its performance, which should be the talking point, rather than the add-on benefit.
4) Incentives for mutual agents
You would have noticed that the persuasive tactics we have discussed so far are aimed at the investor. AMCs also employ indirect means to woo the investor. These indirect means use the agent as leverage. So the AMC woos the agent, who in turn pitches the AMC’s schemes to the investor. Some of the more common agent incentives include higher commissions on specific schemes or on specific targets or on specific initiatives (like getting US64 bondholders to invest the redemption proceeds of their investments in mutual fund schemes from the parent AMC). Of course, everyone knows about the offsite ‘training’ meets arranged for select agents in the most exotic locations.
In conclusion, there are a lot of distractions for investors looking to make an unbiased and informed investment decision. As always, our advice to investors is to ignore the persuasive tactics and invest in mutual funds based on track records over the long-term and across market cycles.
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