'Mutual Funds Are Designed To Provide Premium Return Over Traditional Products'

In 2013, Leo Puri took over the reins at UTI Mutual Fund as Managing Director, and was subsequently elected as Chairman of the Association of Mutual Funds in India (AMFI) last year. In an exclusive interview with BW Businessworld, Puri talks about how the industry needs to evolve in order to improve Mutual Fund penetration within Indian households, on whether retail investors should opt for direct or regular plans, and on how first time investors should go about investing in Mutual Funds.

Edited Excerpts:

Despite them being such an outstanding vehicle for Wealth Creation, the penetration of Mutual Funds amongst Indian households is still woefully low compared to Life Insurance and Bank Deposits. How does the overall ecosystem need to evolve in order to improve upon this?
In order to improve upon this, the industry needs to collectively address three points. Firstly, the performance and benefit of investing in Mutual Funds isn't very well known in India, including the fact that most high performing Mutual Funds tend to outperform equity benchmarks handsomely. Much better communication regarding the performance, cost effectiveness and value proposition is needed. Secondly, there's a conception that these products tend to be complicated, and hence there's a need to 'simplify' mutual funds in the eyes of a client. This can at least partly be achieved by improving investor education & awareness, so that clients understand that though the industry may sometimes complicate these products, the underlying financial concepts related to Mutual Funds are really quite simple, be it related to debt, equity or balanced funds! Thirdly, a stronger platform for distribution and intermediation needs to be built up. Some initiatives such as universal KYC (an equivalent of a 'jan dhan') are in fact round the corner, and we should be seeing more such initiatives going forward. These three points, if properly addressed, can push the Indian Mutual Fund industry ahead multifold in the next five years.

Do you believe that Direct Plans are the way to go for Retail Investors, or the opposite?
I think that within the community of retail investors, there's a very small segment of investors who can be genuinely self-directed. This is both a function of interest, as well as aptitude. The vast majority will continue to need advice, and should in fact be advised. They can decide their preferred source of advice (be it distributors, RIA's, aggregators or the media), but some form of advice is critical - and uninformed investing is a huge danger. The purpose of direct plans was never to reach out to a large class of inexperienced and uninformed investors who are buying something they don't understand, but rather to provide genuinely self-directed investors with an opportunity to invest by themselves. The intention was also to encourage distributors to be more transparent about how they charge for their advice. I think that as the industry evolves, it would be very retrograde to assume that advice will no longer be required. In fact, the role of advice will become more and more critical for the vast majority of clients.

Do you believe that as Indians, our fundamental risk aversion is holding us back from creating long term wealth through Mutual Funds? How does UTI Mutual Fund aim to overcome this hurdle in the future?
There are two ways that we can work around this. The process by which the risk assessment is done at the intermediary level is absolutely critical in order to curb mis-selling. Any portfolio that is constructed should be done only after the risk appetite of the particular investor is understood. For instance, selling high yield debt products with a lot of low rated debt paper in its portfolio to investors who don't understand the difference between buying that product vis-à-vis another fund that consists of highly rated AAA papers and government securities, is actually a form of mis-selling! It's very critical that the basic assessment of needs and risk profile is done properly before people are offered a specific product. Secondly, we try and offer products that inherently balance out risk by themselves - for instance, balanced funds that have been designed to mitigate risk by investing a part of their portfolios into high grade debt, thereby dampening volatility. We also offer products such as capital protection oriented funds that are very heavily geared towards debt (with some portion allocated to equity in order to take advantage of potential upsides). UTI has always had a host of balanced products, ranging from ULIP's to Retirement Benefit plans, which focus on these unique needs.

What advice would you give to the readers of BW Businessworld who are first time investors into Mutual Funds?
First and foremost, inform yourself! Take the time to understand the product and its benefits. Also, understand your own risk appetite before you embark on this journey so that your expectations are well aligned with what Mutual Funds have to offer. Mutual Funds are a product that are inherently designed to provide a premium return over traditional products such as bank deposits or government bonds, and they do therefore carry a higher level of volatility. If nothing else, it's important that this is recognized and the cash flow needs of the investor are planned accordingly, so that they are not either panicked to execute a fire sale, nor do they overextend or over-allocate their resources to this category.

Could you please throw some light on the specific "Investor Education" initiatives being taken by UTI Mutual Fund?
UTI's initiative 'Swatantra' is viewed as one of the most successful and durable initiatives undertaken by an AMC towards investor education. What it attempts to do is to provide a neutral platform for independent experts and financial journalists to come forward and share their expertise with essentially retail investors. It is targeted at consciously creating different segments (such as first time investors, housewives and retirees) and addressing their specific needs. All of these communities tend to have a slightly different skew on how they approach their investments. Some groups may believe that they are well protected already or are used to a very 'cocooned' system, but of course inflation doesn't always work in their favor. Others simply tend to have different priorities (such as young college students) and we try to put these products into their focal area. Others are probably a bit intimidated, and so it's an attempt to simply demystify and make things simpler for them. We've experimented with different formats and are now even experimenting with regional languages - such as Bengali, Marathi & Hindi as well. We've initiated tie ups beyond just the English Media in order to encompass a much broader section of people and create localized content. The feedback we get has been generally positive, and so far this has proven to be an effective way of simplifying, demystifying and connecting retail investors to the Mutual Fund industry.