The Q&A covers pertinent points with an investor-focus in a clear and jargon-free language. It also discusses the recent changes proposed by SEBI and its implications. I was happy to be part of this Q&A and throw light on the finer aspects of the Mutual Fund Industry.

Take a look and tell me what you think in comments.

Mr Vikaas M. Sachdeva is Country Head – Business Development, Bharti Axa Investment Managers. A career sales professional, he has spent close to two decades marketing and distributing mutual fund products. In an interaction with Business Line, he talks about how changes in regulation have impacted the MF business.

SEBI has suggested that the management fees that are admissible under various fund categories be standardised. How will this affect business?

The reason there was a distinction in the first place was that retail is far more expensive to penetrate, service and retain. Most retail customers across the country are still not Net-savvy and require a lot of handholding by the distributor. Compared to that, the cost of servicing an HNI customer or an institutional client is far lower. Recognising this, there was a differential expense ratio and load structure earlier. After the load equilibrium, SEBI is suggesting expense ratio equilibrium across the board in the same scheme.

It’s still early days to ascertain the benefits of reducing expense ratio to the retail customer. For institutional / HNI customer any increase in the expense ratio is a function of fund performance.

SEBI has proposed to reduce the turnaround time for the offering period for ELSS schemes, excess refund, and the like. Will customer service costs increase?

There won’t be additional cost due to reducing the time for issuing statement of accounts, refunds and so on. Once the allotment is done, all other processes are completed in two to three days time. However, there would be additional cost for ASBA and exchange fees that are yet to be identified. There would be operational difficulties primarily due to the highly retail nature of the scheme.

With distributors turning the other way, how do you plan to shore up retail sales?

I think it is imperative for distributors to continuously look favourably at the product category if not the individual product. We are still not at the tipping point where there is mass conversion into mutual funds because of brand pull, financial literacy or sheer convenience and hence, a sizeable dependence is still on the distributor. At our end, our funds offer convenience in terms of daily SIPs/ STPs, eco plans and the like. We are also committed to increase awareness by investing in investor training and education.

How do you plan to correct the mismatch between investment objectives of an investor vis-a-vis the options available to him? What contingency plans do you have in place for non-performing schemes?

As a fund house, we keep things simple. We outline our investment objective in a detailed manner and then stick to it. The Bharti AXA Focused Infrastructure Fund for example, clearly outlines the sectors it will invest in as well as those it will NOT invest in. This gives an investor a clear idea of what he would be getting into. Hence, there is a clear alignment of expectations.

As far as performance, or the lack of it, there are clear norms laid down by rating agencies available in the public domain. Based on our internal controls and a consistent peer benchmarking process, we are aligned to market expectations. We endeavour to perform consistently over a reasonable period of time.

What are the remedial measures that you suggest for tackling mis-selling?

Mis-selling can happen at any level. The only way to discourage it is by more information dissemination and action against erring stakeholders. Incidences of mis-selling are few and far as this is one of the most regulated industries in the country. The key issue for our industry is to encourage the distributor to sell more as more and more of them are falling off the grid.

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Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.

This game of strategy has an important lesson for us when it comes to investing. If you are wondering how, consider this:

Your investment objective is the King of the board. The various coins are the different investment vehicles that you may use to achieve your dream.

For instance, the Queen could be likened Diversified Equity Fund. This is a core investment with powers to move any side but ensure protection and growth at the same time. The Rook is the powerhouse and can give you great results in the long run. I would probably equate it with investing in Real Estate. The Bishop is a linear movement coin, which is always important and safe to have on the board. It can probably be likened to the Liquid Funds or even cash holdings. The horse on the other hand is like Gold. Alternative asset classes (just like the alternate moves) and provides the much needed fillip when required the most. It can also hedge your investments in financial investments because these asset classes have a cycle of their own and may not be in sync with Equity markets. And your pawns would be fringe investments. Direct Equity and sector / thematic funds would fall into this category. They can be very useful tools to provide you the necessary fillip when you need it the most. Similarly, direct stocks or theme funds may turn in high returns suddenly and your portfolio may look great or turn towards the good overnight.

So what do you learn from this?

• If you notice, the most important piece in the board is the King. It would then be apt to connect the King with your investment objective. At all points, this focus should be maintained and you must realize that the rest of the coins viz., the investment vehicles are just tools in achieving the investment objective.
• There is an adage; never fall in love with the path and lose sight of the destination.
  In a game of chess, you may end up sacrificing a coin to save the King. Similarly, you may have to let go of some investment vehicles, depending on the time, the macro economic scenario and the performance of the investment vehicle. For instance, if a stock is performing well and has given you say 50% absolute return in 2 months, don’t fall in love and expect it to give you say 60%. It is absolutely fine to book your profits and exit the stock. Because a performing stock is not the destination, the investment objective is!
• You would always have different coins in the move at any point of the game. It is never possible for you to play an entire game of chess without using say, the pawn that starts on D2. Likewise, you must always have different asset classes and different investment vehicles working for your investment objective. By doing so, you would increase the chances of achieving your investment objective because all your eggs won’t be in a single basket.
• Risk is a friend – if properly used. Yes, some investment vehicles are high on risk. But that doesn’t mean that you stay away from them forever. It is important to embrace risk, but with a cautious approach. For example, never invest more than 10% in a single vehicle OR never invest more than 40% of your portfolio in a single asset class etc. These are just illustrations and will change from person to person. The idea is to apply thought and engage risk positively.
• Even the best of kings will always have a minster. And your minister would be the financial advisor. Always consult your advisor to gauge your risk appetite, performance of a vehicle, macro economic scenario etc., before making an investment decision.

So the next time you need to make an investment decision, think of the Chess Board and the learning it provides. It is important to understand your risk appetite and build a portfolio of diversified asset classes to ensure that your investment dream for tomorrow is met, while you don’t lose sleep today.

Happy investing!

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Disclaimer: All views expressed in this blog are my personal and in no way express or implied, of that of the company I work with, or have worked with in the past.

The innovation in finance that is unfolding in Mexico is another case in point. Infonavit, a leading financial institution that specializes in providing housing credit had come up with a series of innovations in structuring credit products for the housing market. One of their programs targets those who do not have the access to mortgage credit from financial intermediaries. Under this program, a worker can qualify for financial intermediary mortgage credit using his/her individual account in Infonavit as a non-default guarantee. This means, the company can deduct its monthly loan outgo in the event of the individual’s unemployment, from the account that the person has with Infonavit. There is no ceiling for the amount of loan that the person can borrow from the company.

When I look at such examples, I often wonder what companies should do, especially in India, to come up with profitable innovations and alter the market in a positive way. Here’s what I think companies can do:

First, identify the critical problems that your target customer faces as opposed to identifying vague customer needs and then come up with a wholly new solution. This is precisely what Infonavit tried to do. They discovered that, access to finance for housing is really difficult for workers. This, in one sense was a critical problem for their target audience. That’s where they pitched in with a totally novel financial offering that allowed workers to obtain funding for housing through lenient, yet risk-free credit terms. The correct identification of your customers’ core problems has many advantages. For one, it helps you to come up with innovations that are relevant to your customers’ `critical need sphere.’ Moreover, such innovative offerings are likely to be immediately accepted by your target audience. The reason why many MF schemes in India attract a large following is primarily because they are able to target the critical issues/needs/problems that their investors are confronting and don’t stick to superficial investment rationale. They just address certain superficial investment rationale.

Second, as someone has rightly said, innovation is part inspiration. And as the adage goes, success breeds more success. This is a maxim that business practitioners need to take more seriously. As mature organizations, we all should start projecting our profitable innovators or the innovations team as role models. This goes beyond honoring them in the cosmetic Rewards & Recognition ceremony. The senior management should cascade the achievement stories, down to every line managers and SBU heads, with a mandate to circulate the story in informal coffee table conversations with their respective teams. The immediate reporting head talking about such stories will have a personalized effect as opposed to the senior management sending an impersonal mail via the company’s distribution list. This is more so because several studies suggest that role models are best created within an organization only when a person is positively talked about by someone with whom the employees have a strong rapport. In most cases employees often have a personal rapport with the immediate reporting head.

One of the key challenges of innovation and ideas is linking it to execution and profits. Vijay Govindarajan, the Earl C Daum Professor of International Business at Tuck School of Business, Dartmouth College, in a recent article mentioned that the trouble begins when you start acting upon the idea. He further adds that most companies are unsuccessful to roll out great ideas because often they get carried away with too many ideas. Execution is the key to roll out – sharpen and formalize the idea for a business to derive value and commercial success.

Lastly, ensure that you put your techniques used in your innovations in the Knowledge Management (KM) Platforms that you have created within your organizations. This will give valuable inputs to your organization on the whole dimension of “how to innovate profitably”? Most companies capture innovations only from the perspective of value delivered to the business. However, they need to tweak their systems to capture innovation from the context of the pattern of thinking that went behind the innovative ideas. Further, in all such KM initiatives companies should also mention the challenges that they had encountered while implementing the innovation. This is yet again an aspect that organizations miss out on. Most innovations that are captured in the KM systems in companies are silent on the challenges encountered. This leads to generation of a lot of innovative ideas within the organization that often ignores the implementation issues and bottlenecks. The result: companies launch the so-called “innovative projects” only to find that they do not deliver results due to certain intrinsic challenges.

I feel that for any innovation to succeed within an organization, the team is a critical factor. Routine parameters of organizational measurement of meritocracy like work experience, seniority or professional education should not be the criteria for choosing a team for innovation.. The leadership of the innovation team should be anchored at the highest level with direct reporting to the CEO’s office which shows the organization’s commitment to develop innovation led thinking within the company.

Let me conclude my discussion by saying that if organizations have a scientific method to inspire employees to deliver business-relevant, value-creating innovations, and companies would perhaps be operating in a different world today.

Some days back, a handful of finance and MF experts had a nice debate on the changes in the finance sector and what the road ahead looks like. Financial publication Money Today covered it.

Fortunately I, too, was a part of it.

Take a look and tell me what you think in comments.

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Despite a 110-billion Euro bailout for Greece, the crisis is far from over. It may yet turn into a European meltdown, since the future of debt-ridden Spain, Italy and other Southern European economies is still shrouded in grimness.

The plight of Greece brings to the fore, yet again, the issue of overconsumption and excessive debt-orientation at a larger scale. It is a mere continuation of the disturbing trend behind the sub-prime mortgage crisis in the US that triggered the global recession of 2008. While the American crisis began at a micro-level to spin out of control on a macro level, the Greek public debt crisis is a result of fiscally reckless national extravagance of a government. Yet, there are many inherent similarities between the two that need examining in greater detail.

Firstly, both the crises have been caused by a large section of the population living beyond its means for an extended period of time. Secondly, both the crises have rattled global investors and put a downward pressure on two strong currency pegs: the US Dollar and the Euro. Post the subprime crisis, the downfall of the Dollar pushed emerging economies toward decoupling their currencies. Just as the Euro was looking a lucrative pegging option, the Greek crisis flung it on a downward spiral and has triggered the need for a EUR 750 – billion international intervention to stabilise it.

Another striking similarity can be seen in the aftermath of both the subprime and Greek crises. Both have predominantly affected the developed Western economies, while the emerging economies including the BRICs have showed unprecedented resilience. The BRICs have, for example, maintained a robust growth rate averaging 5.2% despite the global credit squeeze and economic downturn. It is likely that the Greek crisis may not leave any lasting damage on these economies, especially since America is now firmly on the path to recovery. From the investor perspective, outlook for emerging markets is upbeat and hence, we may see ever more FIIs (and a lot of market volatility, as a result) flocking to India this year. But any rally, however good, may not be sustainable in the short run, since global economic pressures will act up.

Market volatility is not necessarily a reason for pessimism, merely a time to exercise caution. For the time being, staying cash rich is the best option, but the time to invest is not far off. Once the bailouts stabilise and the austerity measures in Greece and other Southern European economies start paying off, the ambiguity in the markets will ease off. Meanwhile, we need to keep in mind what these two crises have taught us:

• That there is no sector, industry or economy that ‘always goes up, never comes down’, hence never assume that an upward trend will last forever.
• That leveraging, per se, is not bad, but leveraging beyond your means is a recipe for disaster.
• That emerging economies like China, India and Brazil, are stronger than imagined by the West.
• That stringent financial regulation and policy-level discipline are essential to avoid, if not eliminate, indiscriminate asset bubbles.
• And most importantly, a debt-oriented way of life is not sustainable, whether on personal or on a country-level.