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WF: MF industry statistics reveal that over 70% of MF investors invest only in equity oriented funds. Given that almost all MF investors have some form of debt holdings or the other, why have we not been able to cross sell debt funds effectively to our equity fund investors?
Raja: There has been spurt in retail participation of debt products. The Assets of retail in debt funds have increased by over 27% in this financial year. There has been great interest in various categories of funds- ultrashort term, short term, funds which also take a credit call, fixed maturity plans. In addition to these pure debt funds there is traction in hybrid products like capital protection oriented funds, monthly income plans etc which are predominantly debt oriented but include a dash of equity too.
With the dearth of avenues providing reasonable guaranteed returns like tax savings bonds and with bank deposits yielding less returns and tax inefficient, retail interest in mutual fund debt products has been on the increase.
WF: What specific strategies can you recommend to distributors to increase their cross sales efforts of debt funds into equity fund investors?
Raja: Hybrid products like Monthly Income Plans in the open ended space and capital protection oriented funds in the close ended space could be excellent options for those who wish to get the advantage of both the asset classes-debt and equity.
Another strategy could be to sell Systematic transfer plans to promote investing in equity systematically while having a liquid or ultra-short term fund as the source fund. This would enable an investor to invest in a disciplined manner in equity schemes while at the same time get the benefit of returns for the amount not invested in equity , which would be more than that of bank deposits.
WF: Demonetization is considered as a huge driver for debt funds. Do industry statistics for Nov16-Feb17 demonstrate a material uptick in creation of new debt fund investor folios? What can be done to build further momentum arising from this event?
Raja: Post demonetization, retail assets under debt funds have grown by around 8% and this would be a much healthier figure at the end of this financial year, if retail interest in fixed maturity plans and debt funds to get the additional indexation benefit, is any indication. Fixed Maturity Plans mimic to a great extent the bank deposits. For investors who need a little extra kicker to their returns, hybrid products like Capital Protection Oriented products would be the ideal choice.
WF: Zero volatility expectation when considering debt funds is seen as the biggest stumbling block in getting higher retail penetration. In what ways can we try and overcome this - from a product perspective as well as a communications perspective?
Raja: The asymmetry between values that investors put on gains or losses makes it difficult to convince investors to invest in products that do not guarantee returns. What one should realise that over a short time increment, one observes the variability of the portfolio, not the returns. Our emotions are not designed to understand the point. Where it is difficult to change such behaviour, it would be advisable to adapt to it. FMPs provide a time scale to eliminate the noise caused by short term information and enables the investor to tame the emotions and realise performance.
WF: Fund managers are divided on whether the bonds bull market in India has ended or got extended. What is your perspective and outlook on fixed income markets going forward?
Raja: The underlying theme for 2017, would be to focus on capital preservation and reasonable income accrued. We believe that funds having a combination of higher income accrual and short to medium duration would provide a good investment opportunity for the investors. Hence, funds like UTI Treasury advantage fund, UTI Floating rate fund, UTI Short term Income fund, UTI Income opportunities fund and UTI Medium term fund would be ideal choices for investors to invest their incremental flows. They should maintain their exposure in long term duration funds like UTI Dynamic bond fund and UTI Bond fund to capture any possible downward movement in interest rates.
WF: There is a strong view among advisors that retail investors should be offered only accrual products and should generally refrain from duration funds. Is there merit in this view? Should we look at higher investment thresholds in duration funds to actively dissuade small investors
Raja: The best way is to design a choice architecture that would alter people's behaviour in a predictable way without forbidding any options or significantly changing the economic incentives. Increasing the threshold limits may not be easy to justify and could cause a dent in the "liberatarian" aspect of our strategies- people should be free to do what they like. However, the way advisors organize the context in which investors make decisions can nudge investors to prefer accrual products to duration products.
WF: Instant withdrawal upto Rs.2 lakhs from ultra short term funds is seen as a great business driver and customer acquisition tool on one hand, and on the other hand as a risk especially when volumes go up. What is your perspective on this facility and how best can we ensure its scalability?
Raja: Ideally, such facility should be limited to liquid funds only as ultra-short term funds are loosely defined lot. This facility is to evoke investors interest in such fund and provide comfort to investors that liquidity is available on par with savings bank account. True, it involves a cost and hence could be a factor restricting the scalability. But, with the tweaking of regulations a little bit, such cost could be reduced to a great extent and made scalable.
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