“Technology Alone Cannot Replace The Role Of An Advisor”

G. Pradeepkumar, CEO of Union KBC Mutual Fund speaks to BW Businessworld on the reasons that are holding back retail investors from investing in and making returns from Mutual Funds, Goal Alignment of Mutual Fund investments, his AMC’s future plans for growth and more.

Despite a concerted effort towards Investor Education & Awareness, the overall penetration of Mutual Funds into Indian households remains low. Do you believe its risk aversion that keeps many savers away from mutual funds, or is it a general distrust of the markets and a lack of awareness? How does the industry need to evolve in order to take the penetration of MF's to 20 percent plus levels in the times to come?
The Indian Mutual Fund industry has shown sizable growth during the last financial year FY 2015-16, as is evident from the increase in the industry AUM, number of folios and total number of SIPs (Systematic Investment Plan). During FY 2015-16, the AUM of the industry grew by around 14%, with the folio count rising by more than 18% and the count of SIPs rising to about 95 lac SIPs from previous year count of 67 lac SIPs, a stellar growth of more than 41%. All these numbers do give us the comfort that the industry is progressing at a healthy pace.

In our view, the Mutual Fund Industry has generally been following the money and was largely restricted to a few big cities for business. The Industry needs to expand the market by widening its reach. The industry needs more players and a much larger number of distributors to achieve this. There are many Asset Management Companies and Distributors that have developed unique business and distribution models. I feel this is a healthy thing. It has been our experience that once you are able to sit in front of a prospective investor and have a conversation, it is easy to convince them about the benefits of investing in mutual funds. The bigger challenge is to reach out to the investors. That is why I feel strongly that we need many more distributors.
Lack of access to quality advice may be one factor that is holding back retail investors, especially from smaller towns, from investing in mutual funds. Indian Life Insurance companies put together had more than 20 lakh agents registered as compared to just above 1 lakh ARN holders. Out of this one lakh, only around 60% are Know Your Distributor (KYD) compliant and are allowed to distribute Mutual Fund products. This number needs to increase substantially. In my view, it is very important for retail investors to obtain good quality investment advice while investing in funds. Especially for a new investor, if the initial experience is bad on account of wrong asset allocation or improper selection of funds etc., the industry may lose that investor forever. To further improve the penetration of mutual funds, the experience of investing in Mutual Funds has to be easy and convenient. Technology can play a big role in this.

A lot of investors that we speak to state that they've lost money in Mutual Funds and are therefore averse to considering them again. When we check back on past returns, however, the picture usually looks different. Why do so many retail clients end up not making money in an instrument, which on paper, beats traditional products hands down?
The primary reasons for a dissatisfied retail investor are typically unrealistic expectation from their investment, improper selection of products and lack of proper advice.

Many retail investors end up exiting the market whenever there is short term volatility. Skewed asset allocation brings down the portfolio return considerably. In our view, investments in equity funds should be held long enough to generate meaningful returns. 3 years is not long enough for investment in equity products. Investment should he held for at least two business cycles. Nowadays, the business cycle is generally of 5 years. Having said that, an investment should be made keeping a target in mind and if the investment generates the desired target, the investor should come out of the investment and evaluate options with revised goals. Based on this thought, we launched our Trigger fund series wherein the fund had an inbuilt target level of 30% appreciation or maximum 3 years, whichever came first. Since the Fund (Union KBC Trigger Fund - Series 1) achieved 30% appreciation in about nine months, the Fund was wound up and all the money was paid to investors. A good advisor can play an important role, as she is expected to set out realistic expectations from the investment, pick an appropriate investment product for the investor and guide the investor throughout the holding period.

Do you see the future of the MF industry as a distributor led one; or rather a technology led one? Will MF's become commoditized in the times to come, thereby undermining the role of the intermediary?
It would not be appropriate to view technology and distributor as mutually exclusive. Technology should be used for improving the effectiveness of the distribution network and for increasing the ease of investing. Technology alone cannot replace the role of an advisor. The right combination would be a good advisor with access to the best that technology can offer.

A lot of Advisors and Asset Management Companies are now trying to align Mutual Fund investments to future Financial Goals. Even Union KBC's website boasts of an impressive Goal Calculator. In principle, this is a great initiative. What challenges do you foresee in moving the industry towards Goal Based investments; and more importantly - in maintaining Goal Ownership at the client level over the length of the customer life cycle, and through market downturns?
We have always subscribed to the thought of goal based investment. Incrementally, now we are propagating the idea of linking an SIP with a goal. Accordingly, we have launched our Investor Awareness Program (IAP) campaign on using SIP for goal based planning such as Strategic Investment Planning (SIP), Home Investment Planning (HIP) and Education Investment Planning (EIP). SIP as a product suffers from high premature closure ratio since many investors tend to discontinue their SIP when the market turns bad. By giving a tangible target and an emotional connect, we expect that over a period of time there will be longer tenure SIPs with lower pre-closure ratio.

Please tell us about some of the Investor Education initiatives undertaken by Union KBC Mutual Fund in the past. Have you observed tangible outcomes from any of these initiatives?
We have conducted a number of programs to increase investor awareness about mutual funds. Very often, we get external experts to come and talk about the benefits of financial planning and about the role of mutual funds in it. These initiatives are not intended for generating immediate investments by investors in mutual funds. Having said that, we believe that the extensive work done by various AMCs have contributed significantly to the addition of new investors in the recent past.

Lastly, could you share with BW Business World some of Union KBC Mutual Fund's goals and targets with respect to AUM, unique families, or Tier 2 city penetration?
I think there is widespread acceptance among all stakeholders that the industry has to really focus on bringing in more investors. Chasing AUM targets alone is not the right thing to do. In fact, there are many industry leaders who believe that we should stop publishing the AUM of mutual funds and instead should publish only the number of folios. I tend to agree with that. We have set some ambitious targets for ourselves. We are aiming for one lakh SIPs in the next 12 months. We are keen on adding more investors. In the next five years, we shall be looking to triple our number of folios. We expect that 40% to 50% of these folios will come from B15 cities.

The views expressed or statements made in this document are purely the views of the author and do not necessarily represent the views of either the Company or its affiliates.

The views expressed or statements made in this document are as of the end of June 2016, and can change without any notice.

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