The mutual fund industry has failed in branding and
marketing its products.
With returns of 15-30 per cent per annum during the last ten
years, equity mutual funds have delivered the goods for investors who stayed
wedded to them. Despite this, the industry has failed to convince investors
that mutual funds are a good option for their long-term goals.
Ask an ordinary investor regarding this, and he will
probably tell you that his ‘long-term' money is locked into an insurer's
endowment plan or public provident fund. If he owns equity mutual funds at all,
he plans to cash out in a couple of years' time. Data from the Association of
Mutual funds of India shows that 48 per cent of all investors in equity mutual
funds held their units for less than 2 years.
INFLATION IGNORED?
This investor behaviour defies logic. Why does an investor
stay on patiently for ten years with a product that earns him 5-6 per cent a
year, and yet shun one which delivers 15-20 per cent?
After all, the basic intention of putting away money for the
long term is to make sure your savings grow at a rate that beats inflation.
During a ten-year period, stock market investments are more likely to deliver
an inflation-beating return than debt products. In the short term, equity
investments are more likely than any investment to sustain losses.
This quirky investor behaviour suggests three things.
We like predictability.
One, Indian investors prefer predictability compared to
returns. They are so spooked by the ups and downs of the stock market that they
would rather choose a guaranteed return product that barely preserves their
capital, compared to a market-linked one.
If this is the problem, funds can address this by offering
guaranteed return products. Insurers in India have always offered guaranteed
return products (with such a small ‘guarantee' that it can be easily
accomplished), but funds haven't, as the practice is frowned upon by the
Securities and Exchange Board of India.
Guaranteed returns however, aren't expressly forbidden by
Securities and Exchange Board of India. All the regulations say is that, if a
fund makes a guarantee, it should have the resources to make good the
shortfall, if the portfolio doesn't deliver the promised sum.
Lock-in is good.
Two, investors actually like the discipline that a lock-in
period imposes. Insurance plans or the PPF require you to deposit money every
year, and don't allow you to withdraw it too easily. Mutual funds, in contrast,
have embraced the open-end structure. Investors unhappy with the fund's
performance can pull out their money on any day of their choice. When markets
do a yo-yo act, there is thus a strong temptation to pull out.
Finally, investors may willingly accept a locked-in equity
investment, if they are given the feeling that the money is being set aside
towards a noble goal. The old Unit Trust of India (UTI) had enormous success
with its long-term schemes such as Rajalakshmi, Grihalakshmi, and so on. These
specifically allowed savings towards a goal such as a daughter's marriage or
education. Insurance companies successfully market children's plans to
investors, though they call for long-term investing in equity instruments.
No branding please, we're the Funds.
This suggests that where the mutual fund industry has failed
is in branding and marketing its products. By branding its offerings as
‘mid-cap funds', ‘infrastructure funds', ‘strategic sector funds', and so on,
the industry has failed to strike a chord with its customers.
Information on where the fund plans to invest may be quite
useful to an informed investor who dabbles daily in the stock market.
But to an ordinary person looking simply to save money to
fund his daughter's college degree ten years hence, the stock market
association may be quite disconcerting.
Overall, defining fund products in terms of the investor's
requirements (say, a retirement fund, or a schooling fund) may be all that is
needed to make sure that investors stay with equity funds for the long term.
Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article3220409.ece
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