The big business of small investors
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It is like entering a factory where everything is precisely the way it should be. Each relationship manager, about 15 of them, is assigned a neatly appointed desk with a computer and adequate stationary, and plenty of ergonomically designed chairs around. The fans above whirr quietly. There is enough leg space to stretch and sit comfortably. Relationship managers are dressed in crisp, ironed uniforms. As you take your seat, you cannot miss the barrage of neatly and simply prepared banners trying to convince you of the merit of systematic investment plans (SIP) and the power of compounding. Even the office walls are full of banners advocating the right steps to wealth creation.
The office of Krushna Finance, one of India’s largest mutual fund (MF) distributors, in Vashi, in Navi Mumbai, is decked up to convince even the hardcore pessimist to invest some money, if not her entire wallet. Some investors, mostly senior citizens, can be seen going over their portfolios and account statements with their relationship managers. Sanjay Khatri, chief executive office, Krushna Finance, says that although 60% of his clients are senior citizens, many of them were his clients even when they were about 40 years old.
So, what are the perils of advising so many senior citizens, we ask? “I have a glass door outside. Think of the number of times it could have been broken if I were mis-selling. Besides, Vashi is a small satellite town where many retirees live. There are about 19 senior citizen clubs here. People talk and word can spread very fast. I cannot risk my reputation,” he says.
Khatri, who started Krushna Finance in 1994, manages assets worth Rs.700 crore today. In February 2016, he crossed the figure of 10,000 SIPs that he manages all over India; one of the highest number of SIPs in the country. His monthly inflow through SIPs is Rs.3 crore, every month.
Khatri belongs to the community of individuals and institutions who bring financial products to your doorstep. According to data by the Association of Mutual Funds of India (Amfi; the MF industry’s trade body), there are about 75,000 distributors in the country, as on 31 March 2016. After entry load in MFs was abolished in 2009, registration of new distributors had fallen to about 2,500 (2011-12), down from close to 9,800 distributors who got registered in 2007-08 and close to 12,700 who had got registered in 2008-09. However, as equity markets have been up again since 2013, more distributors are coming into the fold. In 2013-14, 2014-15 and 2015-16, close to 6,400, 6,000 and 8,200 new distributors (individuals) have got the licence to sell. The number of new corporate distributors to enroll, too, has gone up, from a low of 182 new registrations in 2012-13 to 611 in 2015-16.
These are the people you go to buy your next MF, to start your SIP, sometimes to also plan your finances, to get your account statement if your fund house has not sent you one, or to inquire about a lost dividend. And then, for the bigger things in life—to plan for your child’s higher education, your own retirement, buying a house someday and so on. Some distributors may sell you a lemon—we have all heard those tales—but others help you build a financial nest.
When Bengaluru-based couple Shyam and Priya Sunder decided to set up PeakAlpha Investment Services Pvt. Ltd, a financial planning company in Bengaluru in 2005, Shyam decided to put his communication skills to good use. Having realised that it will take time for clients to walk into their office on their own, the couple decided to step out and hit the road. They approached companies— some were their ex-employers, such as Accenture Plc and Mphasis Ltd—and started to hold workshops. The Sunders had a plan. “Apart from some of these attendees, hopefully, becoming our customers, they would start their relationship with us not only with a good understanding of what they can expect from engaging with a financial planner, but also quite a bit about the process of financial planning and investing. Also at an early age, hopefully,” says Shyam.
Bengaluru is the information technology (IT) hub of India and the technology companies attracted young talent from all across the country. Mphasis was an obvious starting point for Shyam as he had worked there for two years, before he and Priya started PeakAlpha. Shyam says he wanted customers to come in by the bus load, rather than trickle in one by one. Today, PeakAlpha has about 3,300 customers, of which about 2,500 have come in through workshops, says Shyam.
An established distributor may choose to focus on one or a few classes of clients—the wealthy, the mass affluent, the high net worth individuals (HNIs), or retail, and so on. But most distributors start at a lower stratum of the investing population, which is the retail customer.
So, who is a retail customer? In the MF parlance, a retail customer is an individual whose investment and portfolio value is less than Rs.5 lakh. An individual whose portfolio value is more than this is termed as an HNI. But different banks, distributors and financial planners follow varying definitions and offer different facilities to such groups. But universally, the higher your net worth, the more the number of facilities your distributor offers, especially if it is a bank.
According to Amfi data, as on June 2015, retail investors invested around Rs.61,000 on an average per account, in MFs, while HNIs invested around Rs.21.61 lakh. That’s just the average though; investors can invest as low as Rs.10,000-20,000 too. So is there merit in distributors going after the small fish?
Up till 2003, Gurgaon-based Ashish Chadha, an MF distributor, was more than happy to cater to large clients; chief among them was GE Capital, the financial services arm of US-based GE Electric. Chadha, a retired army man who served in the Indian Army for 11 years at various places, started his distribution firm in 1995, when he was 31 years old. A few lucky connections got him started with managing the regimental funds of the President of India’s bodyguards (a corpus of about Rs.10 lakh at the time), followed by the provident fund (PF) and superannuation trust of GE Capital’s India unit (corpus of about Rs.1-2 crore at the time), and later executing the trades of HSBC India’s PF trust. Chadha was happy handling big money; clients were fewer but the corpus was bigger, which would lead to higher and—what he thought at the time—steady income.
But in 2003, both GE Capital and HSBC India shifted their PF trusts to the PF commissioner’s trust, a central government fund manager. Chadha got a jolt. “After GE left, there was a huge void. Up until then, my gross income was about Rs.80,000-90,000 per month. That came down to nil. I felt completely helpless. After working hard for 7-8 years, I had to rebuild my business from scratch,” he says.
That is when Chadha realised that retail investors’ money is smaller but also stickier than what comes from large institutions. Fortunately, though, thanks to his association with GE Capital, he started giving sessions on financial planning to the company’s business process outsourcing (BPO) unit’s employees. However, it wasn’t easy. As most BPOs work full strength during nighttime, Chadha used to leave his office at 3 pm, spend his afternoons and evenings searching for clients, and then reach GE’s BPO office at about 9 pm. Further, since these BPOs, typically, worked according to American and European time, Chadha spent nights giving financial literacy sessions to BPO employees, which would continue till 4 in the morning. Chadha tells us that in those days he used to get clients who invested as little as Rs.3,000 through SIPs. Customers began trickling in, slowly but steadily.
“That is when I realised the power of retail. I realised the merit in not chasing the big business, because rich people may be successful in their chosen spheres but tend to become arrogant and start an inter-agent competition on their investment returns…. I said, let big business come to me; I will spend time in chasing small business,” says Chadha.
Does going retail cost?
As retail money comes in small ticket sizes, it takes time for distributors to break-even and then start making money. Smart distributors have learnt to keep their costs low. D. Muthukrishnan, a Chennai-based certified financial planner, who manages assets worth Rs.111 crore (as of end March 2016), gets inflows worth Rs.1.26 crore every month through SIPs and caters to 176 families. All this from a two-man office—him and his assistant, Partha. As we climb the steps of N.S. House, a one-storey commercial facility with several offices measuring up to a maximum of 250 sq. ft each, in Anna Salai, Chennai, Partha shows us the extent of devastation that last year’s floods had caused; the entire ground floor of the building was completely submerged. Muthukrishnan’s 200-sq. feet office is on the first floor and has sparse furniture.
He works mostly out of home. Apart from a modest office and minimal staff strength, Muthukrishnan’s engagement with clients is geared toward nudging long-term behaviour and limited tracking. “I have purposely stayed away from having my own website and putting my clients’ portfolios there because I don’t want them to track their portfolios everyday,” he explains. Muthukrishnan says he spends much of his time counselling his clients at the beginning of their relationship so that they understand the merits of SIPs and a buy-and-hold strategy. Writing blog posts, sending daily text messages on his clients’ mobile phones with a quote advocating long-term investing is his way of staying in touch with clients. His SIP book is the biggest in the state of Tamil Nadu.
Roopa Venkatkrishnan, a Mumbai-based distributor, works mostly out of her car. In the distribution business since February 2003, with assets under management (AUM) of Rs.600 crore and SIP monthly inflows of Rs.80 lakh, Venkatkrishnan employs only four people, mainly for pickup and delivery of forms and cheques. Meeting clients is important for her, so armed with her laptop, she leaves home at 10 am daily. Her days regularly begin at 7 am and ends well past midnight.
These models work if you either start off with a ready set of clients (like Venkatkrishnan did, thanks to her previous jobs as relationship managers) or if you start with close friends and families and don’t wish to go beyond a point, like Muthukrishnan. But as distributors lower the bar for ticket size, the harder it gets to bring in serious investors.
When Khatri opened shop in 1994 in Vashi, Navi Mumbai was a rising township. People from mainland Mumbai had just started to migrate to Navi Mumbai and many others moving to Mumbai began settling in Navi Mumbai because of cheaper housing and lower rentals. But most of Navi Mumbai’s population was made of the salaried class. Khatri decided to toil. From collecting names and addresses of the earliest customers who used to walk in seeing a distributor’s board outside his office to requesting them to share more references, Khatri started building his database. Then, he befriended a few courier boys, gave them free mobile phones and requested them to click pictures of name plates in buildings they visited to make deliveries.
“We did a lot of this ourselves also. In Navi Mumbai, we covered the adjoining areas of Vashi, Kopar Khairane, Airoli, Sanpada, Juinagar and Nerul,” he says. Additionally, for the past 18 years, Khatri’s team has been sending 600 postcards every day, with mantras of investing written on them, in English and Marathi. He also sends newsletters once a month to potential customers whose database he has carefully built over the years. Khatri is registered with the Registrar of Newspapers for India to be eligible to send the newsletters through the General Post Office; this makes mass mailing cheaper.
Apart from having among the highest number of SIPs in India, his corpus in equity-linked savings schemes (ELSS) is said to be Rs.100-150 crore, one of the highest among independent financial advisers across India, according to MF industry officials. Khatri refused to divulge his AUM breakup.
Experts say that getting the small investor to invest is a tough job. But once she is convinced and invests, typically she is a keeper, they say. The question: how do distributors drill down the message?
Venkatkrishnan likes to take the slow and steady approach. She has sessions with her clients—almost 60% of them are women, so she insists on the husbands to also join their wives—where she explains the need to have goals for every investment.
“I want them to think about why they are investing. Do they want to buy a house? Plan for their kid’s further education? When will they need this money? What will they do with the extra income if the breadwinner gets a salary increment... those sort of things. A significant majority of investors don’t know what they want to do with their money,” she says. Having both spouses participate in these sessions helps the couple marry their thoughts and expectations, she says, adding that people aren’t as averse to investing as we assume. What is needed is guidance. Once, in 2005, she had a meeting with a client. After the meeting was over, the client’s masseur, who was patiently waiting for her outside the house, cautiously walked up to her and asked for money advice. He wanted Venkatkrishnan to invest some of his income. They had a brief chat where she explained the merits of long-term investing and need to stay invested for the long run. The masseur agreed and started an SIP of Rs.1,000.
Smart distributors also focus on SIPs. But do SIPs work? In a recent study (read here: http://bit.ly/1p8PW81 ) which Mint did with Hexagon Wealth, a Bengaluru-based boutique wealth management firm, we found that as the time horizon goes up, SIPs do better. There is no guarantee though. The study also showed that fund selection plays an important role, but the probability of beating inflation rises significantly as the time horizon gets longer.
Some distributors, like Muthukrishnan, are choosy about their clients. Once, he says, a young couple came to his office to hire him as their financial planner. He saw that the couple, both of whom were working for a technology company, had a credit card debt which they were happily rolling over, continuously. They had aspirations to buy a “palatial home”, a car and also wanted to go on a world tour soon. Muthukrishnan said he counselled them for over two hours asking them to first reduce their debt substantially and then come back to him to move ahead with investments. The couple never came back.
What to do with all the money?
You would think that distributors spend most of the time collecting inflows. Not always; some also nudge their investors to spend money.
Chadha, from across his large desk in the basement of his ground floor bungalow in Gurgaon, shows us some of the text messages on his phone that he had sent to his investors, as early as in November 2014, advising them to book profits in equity markets and go on a vacation. In 2014, equity funds had returned 30-60% on the back of a stock market rally due to the change of government at the Centre. Chadha, himself an avid traveller, makes it a point to visit a new location every year.
Venkatkrishnan, too, nudges her clients to enjoy their wealth. But like many seasoned advisers, she is watchful and advises caution if she feels that investors might end up spending too much.
Venkatkrishnan masseur client, by the way, now lives in a 332-sq. ft home that he purchased when the area he lived in, in Andheri, got redeveloped a few years ago. His investments, which Venkatkrishnan has been managing, is now worth Rs.27 lakh, she says with a wide smile. Four months ago, the client came to her and said he wished to buy a bigger house, worth almost Rs.30 lakh. She didn’t give her nod and reminded him that he has a 10-year-old son’s further education to think of.