Lovaii Navlakhi, managing director and chief executive officer, International Money Matters, will remember 2018 for the elaborate switch-over from regular plans in mutual funds to direct plans with an advisory fee that his firm completed for its clients. It was not just about the documentation and the change in schemes, but rather the communication around the fees, why it was going to increase and showing them how much they would save by moving to direct plans.

“For us it was the logical step to take; we weren’t able to do it sooner, thanks to gaps in processes. Clients wanted all the detailed workings on how this works," Navlakhi said. 

All this happened in the backdrop of extremely volatile markets—equity and debt. Market volatility can make investors anxious, especially if it spreads across asset classes.

Another important change in 2018 that impacted investors directly was recategorisation of mutual fund schemes. The Securities and Exchange Board of India, in October 2017, defined 36 categories of mutual fund schemes. Though a great task, most asset managers finished it by May-June 2018. It was an even greater task for advisors to re-establish their knowledge and experience of a specific scheme post recategorisation, and communicate this to their clients. “It took a while, but we managed both (moving to direct and changing allocation to schemes where required) simultaneously," Navlakhi said.

Given these changes, perhaps market volatility was easier to manage. “The older clients expect constant communication, they don’t panic. Those who are new to this do tend to get worried," he said. 

Let’s also remember that the financial year started out on the back foot with the return of long-term capital gains tax for equities. This meant a reduction in return assumptions from the asset. Nevertheless, interest in equities didn’t go down.  

Debt markets felt a different kind of jolt in the second half of the year. With some IL&FS Group companies defaulting on interest payments and subsequent negative returns from some debt funds along with an ensuing crisis in the NBFC sector, domestic debt and money markets saw weeks of uncertainty.

Navlakhi did not have his clients invested in funds that suffered due to this event, but some of his clients had exposure to preference shares issued by IL&FS. Along with regular communication, they prepared at least four notes on the situation for clients. It helped that none of his clients were over-allocated to this security. But the event also served as a wake-up call and soon the debt recommendations were reconsidered and Navlakhi’s firm made the decision to stick to funds with safer portfolios rather than chase the additional 1-1.5% yield, given the level of risk. 

If one were to consider a simple portfolio, there were several changes that impacted investors across asset classes. But even then financial assets did not lose favour with individual investors. 

One thing is for sure though, it is no longer enough to just recommend an investment. This year and events in markets have underlined the importance of communication on all matters, big and small. 

“In the IL&FS case, we admitted our mistake. It helps because clients want to know the next steps and how we will change things in future so that the same mistake is not repeated. Thankfully, on the equity side we had decided to reduce exposure to mid- and small-caps earlier in the year, which helped. A staggered approach has helped us deploy funds for clients at every level in the markets," said Navlakhi. 

Moreover, it’s not just how advisors communicate with clients but also the communication that comes from asset managers to investors and advisors which helps in hand holding through periods of change and volatility.

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