The journey towards your financial goals typically includes equity as well as debt mutual fund (MF) schemes. However, a survey by Cafemutual, an independent forum of MF professionals, has found that a majority of independent individual distributors don’t readily recommend debt funds. In the case of 57% of such distributors, just 6-25% of sales happen in debt funds. But aren’t debt funds an integral part of your asset allocation? We’ll get to it later.
Your financial distributor could help you create the wealth you need to meet your goals or limit your wealth creation by selling unsuitable products. The Cafemutual survey gives insights into how distributors think, work and suggest MF schemes. According to 2017-18 data by the Association of Mutual Funds of India (the MF industry body), there are around 26,600 individual MF distributors who earn at least ₹ 1 lakh annually as distributor commissions. Around 32,000 such distributors earn at least ₹ 50,000 a year as commissions. Cafemutual surveyed 1,117 individual independent distributors across India.
Fund manager or house?
Asked which of the four scheme-related features distributors would emphasize upon the most while selling, 31% said they talk about the scheme's theme or the investment strategy. Next was the fund house’s reputation, followed by the fund manager’s name.
Just 17% distributors said a scheme’s past track record is the most important of the four factors. But doesn’t track record count? “Yes, it counts, but the scheme features are the first thing we have to see. This is what is going to give investors the end-result, if they stay on course. A scheme’s track record comes next," said Amol Joshi, founder, PlanRupee Investment Services, and one of the distributors who was surveyed.
Anup Bhaiya, managing director and CEO, Money Honey Financial Services Pvt. Ltd, said fund manager selection should also take priority over a scheme’s past performance. “If a fund manager has demonstrated his expertise across market cycles, it helps. For example, Kenneth Andrade’s name gets associated with mid-caps, names of S. Naren and Prashant Jain get associated with multi-cap strategies. Time-tested managers backing MF schemes gives us confidence," said Bhaiya.
But many experts said the era of star fund managers is a thing of the past. “Before the MF industry consolidated its schemes in the recently-concluded re-categorisation exercise, a CEO of one of the largest five fund houses had famously said that he doesn’t believe in star fund managers and that is why he had three large-cap (oriented) funds that were managed by three different managers," said Joshi.
The role of distributors
The role of a distributor has evolved from just hawking forms of new fund offers to sitting with you and understanding why you want to save and what you want to achieve. What does the distributor think her main role is? While 37% said it was to help clients make money through well-performing MFs, 45% said it’s about helping clients reach goals, and just 18% said it was to do comprehensive financial planning.
But don’t you need a financial plan to reach your goals? “Not always," said Joshi. Imagine, he explained, that you want to reach a goal of ₹ 20 lakh in five years. If a distributor crunches the number, assuming a rate of, say 12%, she comes up with ₹ 25,000 that you need to put in every month. This is goal planning. But what if you can’t afford to commit ₹ 25,000 every month for the next five years? Or worse, what if your fund doesn’t give 12% returns? Enter financial planning, where, said Joshi, the distributor understands your income, expenses and figures out how much you can save.
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Though equity funds are often projected as preferred vehicles for long-term wealth creation, many experts said debt funds are essential too. But some take a different approach. “When we take stock of a client’s asset allocation, we also include her employee’s Provident Fund and Public Provident Fund. These are debt instruments. Typically, a salaried employee puts around ₹ 1 lakh or so in these instruments. So, there is no point in putting more in debt funds," said Kshitija Ravi, director, Gaining Ground Investment Services, a Bengaluru-based distributor that has 20-25% of its sales in debt funds.
Joshi, however, disagreed. “Debt funds are liquid. Therefore, they are also a vital tool in re-balancing the portfolio," he said.
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This is the most basic requirement but very important. Your distributor or adviser is supposed to recommend funds based on your risk profile. She has to get to know you better. How does she do that? While 52% of the surveyed distributors judge clients based on past interaction, 30% analyse them through a self-made questionnaire and 18% go through a paid risk assessment tool.
Kshitija’s firm, for example, makes clients go through a comprehensive risk assessment questionnaire known as a psychometric test, which comes at an annual cost to the firm. “Psychometric tests never go wrong. Our judgement of a person depends on when and where we talk and can go wrong. A person’s thoughts may be in one direction but she may tell us something different," she said.
While the Cafemutual survey gives an insight into how an average distributor or financial adviser thinks, it speaks of a sample and may not be specific to your own adviser. It’s best to talk to your distributor to find out if her strategy is in line with your needs.