From buying mutual funds to buying dreams

Do you fancy buying a small bar that contains oil, water and lye (sodium hydroxide and potassium hydroxide), and synthetic fragrance? Don’t scratch your head, we’re talking about soap. Now, would you buy a lavender soap that promises to refresh and revitalize you? You may be tempted.

Put it another way: would you prefer a product that invests in top 100 companies by market capitalisation, that are researched using complex ratios such as price-earnings multiple, return on net worth, and price-to-book value? Or would you buy a scheme that gives you enough money to send your daughter to a postgraduate college when she turns 21, without having to take a loan? In both the cases, we’re talking about a mutual fund scheme. The difference is: the former is a product, the latter is a solution. That’s the issue that the Rs22.41 trillion Indian mutual funds industry is trying to address: should it sell you products or dreams?

Fund houses wake up...

Last week, SBI Funds Management Co. Ltd, with assets of Rs2.05 trillion, repackaged its traditional systematic withdrawal plan (SWP) product into a solution that enables you to send money to your immediate family members. With this, you could offer financial help to your parents, kids or your spouse by depositing money in their bank accounts. It even renamed this facility Bandhan, referring to family bonds. “Instead of an investor getting the benefit at the end, the money gets deposited directly in the bank account of the beneficiary family member,” said Anuradha Rao, managing director and chief executive officer, SBI Funds Management Co. Ltd. Rao reiterates that Bandhan SWP is not a new product, “It is a solution. We are not launching any new scheme around it but just enhancing the scope of an existing facility.”

Increasingly, mutual funds are trying to give their investors solutions to their everyday needs. Although insurance companies have, for years, built a successful and sustainable strategy to talk solutions—and not products—mutual funds have somehow always only discussed returns. A large-cap fund outperforming its benchmark here, a mid-cap outperforms its category average there. You’ve hardly heard of a fund house offering solutions to your everyday needs, such as your retirement or early retirement plans or your plans for taking that dream holiday.

But things have slowly started to change now. In the past year, a few fund houses have started offering instant redemptions in their ultra short-term funds. These funds—often considered alternatives to savings bank accounts—would anyway offer redemption within a day. But that, still, wasn’t ‘instant’. In 2016, thanks to technology, Reliance Nippon Life Asset Management Co. Ltd and DSP BlackRock Investment Managers Ltd first started offering instant redemptions in their ultra short-term funds that gave you the money in a matter of minutes. Now ofcourse, this facility can only be offered in just a liquid fund by law, not in ultra short-term funds. But still, it addresses the need to get the money in your hands instantly. “The mutual funds industry is always obsessed about talking markets; the 10-year bond yield here or (S&P BSE) Sensex there, oil prices and so on. Whereas the focus should be on fulfilling the needs and goals of the customer,” said Kalpen Parekh, president, DSP Blackrock Investment Management Ltd.

Franklin Templeton Asset Management (India) Ltd had launched Family Solutions in March 2011. It is a calculator that allows distributors to plan for several goals of their customers, such as: child education, holidays, and a home. The process is simple: distributor asks the investor some basic questions, inputs the data online and gets a recommended set of funds—with the amount that the calculator recommends the investor should put in. If the distributor doesn’t have a computer, she can also get all the details on a form and submit it to one of 39 Franklin Templeton offices in India, or to an office of the Computer Age Management Services Ltd (Cams, one of India’s largest registrar and transfer agents in the mutual funds industry). Franklin Templeton has tied up with Cams at 140 locations across India. The distributor then gets the recommendations the next day, which she can convey to the investor. “It is a system where even if investors are recommended multiple funds, they can give just one cheque,” said Peshotan Dastoor, national sales director, Franklin Templeton India. A good part of Family Solutions is that distributors can actively track the progress of their clients’ goals through it. Also, the schemes are earmarked to the goals in investors’ account statements. Behavioural science experts say that tying up schemes to goals in account statement tends to dissuade premature withdrawals since investors know what that money is meant for.

But examples like these are still few, although many fund houses are slowly realizing the importance of such solutions. Sundeep Sikka, chief executive officer, Reliance Nippon Life Asset Management Co. Ltd told us that when his fund house’s ‘gold savings fund’ was launched in 2011, inflows through systematic investment plan shot up to Rs5.5 lakh, up from less than a lakh every month that used to come in through Reliance Gold Exchange-Traded Fund (ETF). Gold funds in general have been successful in attracting flows from retail investors as they invest their entire corpus in gold ETFs. While a gold ETF has limited appeal because you need a demat account, a gold mutual fund scheme doesn’t require a demat account; you can invest in it like any other mutual fund scheme and it invests the money in a gold ETF.

While gold mutual funds, by way of different products, have served a need; other examples of targeted funds like retirement funds and child care plans haven’t met with much success. The question is: should fund houses launch new products or build wrappers around it? “Why do we have to get boxed in launching new products just to give solutions, like a retirement fund or a children’s fund? Why can’t every fund house have wrappers around its products and market only the wrappers? When the industry comes to a situation where it stops discussing products, it’s only then that it would make a transition from products to solutions,” said Vijay Venkatram, managing director, WealthForum e-zine, a platform that talks about issues and ideas that impact the mutual fund distribution community.

The cost of ‘talking’

Some experts say that there are costs if fund houses want to start ‘talking’ solutions; the emphasis being on ‘talking’, meaning spreading a message. The marketing head of a large fund house told us that typically it costs around Rs1.5 to Rs2 crore for a 30-day outdoor (billboards) advertisement campaign in Mumbai only. A full-page print advertisement in a leading business newspaper costs another about Rs1-Rs5 crore for a 15-day campaign. “To raise awareness, you need to spend Rs5-10 crore but we might not get inflows to match that kind of a spend,” he said on condition of anonymity.

A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd said that it’s not that simple for mutual funds to just stop talking products. ”Products will remain the core of mutual fund business, unlike insurance. In an insurance policy there is insurance, risk cover, illness cover and so on. But a mutual fund is a pure-investment product that takes into account risks, investment style and underlying portfolio construction. That is the core.”

But he adds that it is important for the industry to demonstrate how these products can serve the needs of the people, like income generation, planning for retirement or kids’ marriage. He said it will evolve over time: “Solutions are just one part. Ultimately, the aim of a mutual fund is to make your money grow.”