Important to get Retail Investor
Acclimatised to Investing through MFs
It is important to learn to walk before before you learn to dance and few
are as privileged as Prabhu Deva or Michael Jackson to do both seamlessly
Lakshmi Iyer
CIO (Debt) &
Head, Kotak
Mutual Fund
E
xchange Traded Funds (ETFs) play
an important role for an investor
in his/her investment strategy.
ETFs provide ease of asset allocation
and convenience of capturing the index
potential without the hassle of basket
formation and regular recalibration. This
way ETFs take the benefits of mutual
fund investing to the next level.
For an active investor, ETFs allow
almost real time investment into the
fund. The index experiences price
changes throughout the day. ETFs reflect
these changes like a stock. Thus, an
investor can use ETF to buy and sell at
near index levels.
ETFs by nature are low-cost products
as compared to active mutual funds.
Since ETFs broadly replicate the index,
the need for active trading, fund
management and analysis does not
arise per se. This reduces the cost of
fund management. For this reason, the
regulators limit the chargeable expenses
to the ETF.
Here, it is important to understand
that asset class ownership via ETF is
also for the more financially aware
investor. In a country like India, financial
asset classes like equities still have a
‘Cinderella’ kind of treatment i.e. allocate
only when all other asset classes like
real estate, gold, traditional mode of
investments are consummated. Barring
banking products like fixed deposits,
savings account, etc, most financial
products are actually ‘push’ products.
The population of India is over 1.3
billion (130 crore). Yet the number of
Demat accounts in India is only around
30 million (3 crore). The number of
Mutual Fund (MF) folios is a little over
60 million (6 crore). In that, the unique
mutual fund folios would be much lower.
Additionally, Indian equity markets
still continue to be a ‘land of alpha’
meaning most active equity funds
still continue to outperform their
benchmarks across market capitalisation
with the net of expense ratios charged.
Therefore, initially, it is important
to get a retail investor acclimatized to
the world of investing through actively
managed mutual fund schemes. It is
important to ‘learn to walk’ before ‘you
learn to dance’ and very few are as
privileged as Michael Jackson or Prabhu
Deva to do both almost seamlessly!
In most parts of the country,
especially in non-metro cities in India,
a Systematic Investment Plan (SIP) is
construed as a mutual fund product
rather than a facility to participate in
an asset class like equities. Hence, there
is much of education / awareness that
needs to be done before we proclaim
—financial nirvana in terms of investor
understanding.
Herein, the role of a financial advisor/
distributor is of significance, where
enough time and effort is being spent
to convert a physical mode investor to a
financial asset investor. And as it is said,
'There is no free lunch…’ there has to be
a monetary incentive for the advisor to
get in prospective clients. With the low
expense ratios in ETFs, it is an onerous
task to get an intermediary to advise
ETFs to clients.
However, if you are a financially savvy
investor, you could use ETFs as an ‘add-
on’ to your current in vestment portfolio.
Also, institutional investors who are
more financially aware could use ETFs
as an effective tool as part of their
portfolio. In such cases, you can actually
have your cake with icing and a cherry
on the top!
But for the average Indian retail
investor, while it is good to have proteins
in the diet, the time to understand
‘quinoa’ as high in protein is still some
time away.
www.outlookmoney.com December 2017 Outlook Money
47