Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / What got us here, won’t get us there
BackBack

What got us here, won’t get us there

It is important to adapt to change in our investments; if we continue to follow a legacy approach, we risk not meeting our financial goals

iStockPhotoPremium
iStockPhoto

What comes to your mind when you think about Eastman Kodak Company, Nokia, Blackberry Ltd or local companies like Hindustan Motors Ltd and HMT Ltd? I see companies that could not adapt to change and lost their leadership position in the industry. In contrast, look at companies like Apple Inc. and Google Inc. or local companies like Parle Products Pvt. Ltd, Raymond Ltd and Gujarat Cooperative Milk Marketing Federation Ltd or Amul, all of which have stood the test of time by constantly innovating and adapting to change to stay relevant.

Marshall Goldsmith’s book What got you here won’t get you there aptly brings out this aspect of sustainability in a competitive world. If you don’t watch out, you are destined to the same result.

It holds in personal life as well. We adapt to so many changes like location, employer, culture, food and technology. But the change that has impacted me the most has been technology. In the 1990s, it was the internet, then mobile phones and now smartphones.

What is great to see is how everyone is adapting to the smartphone technology, right from children to senior citizens. I am fascinated by the way that those who did not have running water or electricity, are going all out to learn and operate a smartphone or ‘google’ the internet.

In the same way, it is equally important to adapt to change in our investments. If we continue to follow a legacy approach, we risk not meeting our financial goals. Data on gross household financial savings can be split between traditional savings (mainly currency, deposits, insurance and provident funds) and market-linked savings (shares, debentures, mutual funds).

For every Rs100 saved in financial assets, only about Rs6-7 come into market-linked products, while the rest are invested in traditional legacy products. This was true not only in 2015-16 but also in 2005-06 and even in 1995-96.

This is despite interest rates falling from double digits in the 1990s to 7-8% levels currently.

On the one hand interest rates have fallen steeply, while on the other inflation has meant that we need more money today to meet the same goals than we did two decades ago. Simply put, Rs50,000 would have doubled to Rs1 lakh in roughly 6 years when interest rates were at 12% but today, with rates at 7-8%, you need to start with a bigger amount (Rs62,500) to reach Rs1 lakh in the same period. The trouble is if the cost of achieving your goal has also increased by, say, 20% to Rs1.20 lakh during this period due to inflation, then you need to save almost Rs75,000 at the rate of 8% to reach your new target. There is, therefore, a need for a fundamental shift in investor psyche towards savings and investments.

The asset management industry must do something different to address the two-decade long issue of only about Rs7 out of every Rs100 coming to market-linked products. We need to address the trinity, the three As—awareness, advice and access—if we are to meaningfully build this industry.

Awareness is the most important ingredient to bring about behaviour change. The first step to action is awareness and the industry last year spent nearly Rs300 crore for this cause.

It is heartening to see that these spends have shown slow but positive results. A recent tweet from a financial services group said: 7.5 million systematic investment plans (SIPs) registered in India in the past 30 years versus 2.5 million in just the past 1 year.

But much more remains to be done if mutual funds are to gather a larger share of household financial savings.

Advice is the second crucial leg. Mutual funds, unlike bank fixed deposits and other similar products, neither offer fixed returns nor are they guaranteed. They are also not an aspirational purchase like a smartphone.

But they remain one of the best and most cost-effective ways for investors to reach their financial goals as evidenced by this interesting statistic: the Crisil Amfi Equity Fund Performance Index (which includes 112 equity funds) has returned 13.65% per annum over the 10-year period ended June 2016 (that too tax-free). So, as an industry, it’s imperative that we support and develop a large pool of professional financial advisers to help clients make the right financial decisions.

Finally, we need to ensure clients have access—simple and convenient ways for investors to invest in mutual funds, no matter where they are. With the government allowing electronic know-your-customer (eKYC) processes (through Aadhaar) besides introducing the central KYC or cKYC, onboarding is now possible in a simpler and paperless manner. The payments leg has been paperless for long and today we have multiple electronic payment options for customers.

Service standards have also improved. For example, one need not wait 30 days to start an SIP but can use net banking for the first instalment and auto-debit for subsequent instalments.

Most fund houses and many platforms today also offer distributor-enabled transactions, a secure technology-driven way to transact in mutual funds irrespective of the client’s location.

More action on this front is in store via financial technology, and the trinity of JAM—Jan Dhan Yojana bank accounts, Aadhaar and mobile phones.

When the winds of change blow, some people build walls and others build windmills. We as an industry need to build windmills and be the agents of change.

Sanjay Sapre, president, Franklin Templeton Investments–India.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 06 Oct 2016, 05:33 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App