Industry regulator SEBI released a circular reviewing advertising guidelines for Mutual Funds on 15th March, 2017. Per the circular, the changes are applicable with effect from 1st April, 2017. Among other amendments, two material changes stand out. First, it now becomes mandatory for Mutual Funds to publish point-to-point CAGR (Compound Annualized Growth Rates) for 1, 3 and 5 year periods respectively. Second, Mutual Funds are now permitted to use the 2-basis point (0.02 per cent) of AUM "Investor Awareness Budget" (amounting to roughly Rs. 350 crores as per current AUM figures) towards celebrity endorsements, post SEBI's approval. "Prior approval of SEBI shall be required for issuance of any endorsement of Mutual Funds as a financial product, which features a celebrity for the purpose of increasing awareness of Mutual Funds", states the circular.
Notably, at just 7 per cent of AUM to GDP ratio, the penetration of Mutual Funds as an investment product in India remains abysmally low. In developed Nations, this number is closer to 90 per cent. As a nation of savers, we collectively continue to shy away from the fantastic wealth creation potential that mutual funds afford. Needless to say, then, that all advertising or "investor awareness" initiatives must necessarily be geared towards bringing a larger number of first-time investors into the fold, with the correct mindset and expectations for the future. The question that hangs in the air is: how will these amendments impact investor behaviour, and the Mutual Fund industry's marketing objectives overall?
Let's begin with the act of publishing of performance data. All the disclaimers notwithstanding, it remains an unsavoury truth that investors - especially rookie ones - are magnetised by past performance. And although this is an extremely damaging and counterproductive habit, most first time investors invest keeping past returns in mind - in effect, after NAV's have already gone up significantly: "50 per cent returns in the past one year? Wow - it must be great. Bring it on!".
The reverse applies too. Rarely do retail clients, especially first-timers, make the smart move of investing bravely into a capitulated market - at times when stock prices have fallen in value and future potential for growth abounds. Sadly, those inflexion points often hold the maximum potential for future profit. Both these habits jointly lead to a very poor experience for many first-time investors.
Keeping the above in mind, the efficacy of so prominently publishing and advertising 1-year returns is likely to be questionable. First-time investors would be paradoxically drawn like fireflies into the peaks of bull markets, their confidence bolstered by a dangerous combination of past (short term) returns and limited market knowledge. Disappointed by the inevitable vicissitudes of the markets, these investors are likely to do an about turn if and when this published "performance" fails to sustain into the future. Conversely, just how many investors would commit moneys into an equity fund after reading a past one year return of -40 per cent, although the markets might just be an exquisitely sweet spot at the time? It'll certainly be interesting to see.
Also, worth noting is that a very large segment of first-time investors is opting for SIP's (Systematic Investment Plans) as an entry point into Mutual Fund investing. Point to point SIP returns vary wildly from point to point lump sum returns. There have been scenarios where the three-year point to point returns from an equity fund have been flat to negative, but the SIP returns are surprisingly buoyant. Surely, this fact needs to be considered and this data published somewhere too, in order to set the right expectations for new investors?
Second, the bit about celebrity endorsements. When you consider that most celebrities of repute (such as Aamir Khan and Amitabh Bachchan) command an eye-popping daily fee that ranges between 4-6 crores at last count, it won't be long before the previously beefy investor awareness budget gets drained out. HDFC Mutual Fund, for instance, has an AUM of Rs. 2.21 lakh crore, translating to an investor awareness budget of Rs. 44 crores per year. After paying up Rs. 22 crores to AMFI as per the latest guidelines, it would leave them with Rs. 22 crores to spend on other initiatives in the year. The question is, just how much of this money would be left over after celebrity endorsements are paid for? Not much, I suspect. Wouldn't that leave precious little for the traditional, "roll up your sleeves and get out there" model of generating investor awareness through camps and workshops? For that matter, wouldn't the paucity of funds impact the depth and breadth of the actual awareness campaigns themselves? Only time will tell.
Nevertheless, it's unlikely that any AMC will resist the lure of using their investor awareness budget for the purpose of appending a famous face to their brand. Although the circular stipulates that "celebrity endorsements should not promote a scheme of a particular Mutual Fund or be used as a branding exercise of a Mutual Fund house / AMC", you can't quite take away the surrogate advertising effect that these celebrity endorsements will create for the asset management company. It'll be interesting to see how the regulator approaches these endorsements - it's unlikely that they'll give mutual fund companies carte blanche in this respect.
To sum up - be prepared to see your favourite celebrity touting mutual funds this year, along with a smattering of impressive looking performance data. Just make sure you keep your head down and take an informed investment decision in line with your future goals and risk appetite, though. After all, Mutual Funds are subject to market risks, and past performances do not necessarily guarantee future returns!
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