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Last week, I was speaking at the CII's Annual Mutual Fund Conference. One of the issues that was raised involved selling suitable solutions to the investor. The argument was that pushing of products has hurt investors and there is rampant misselling.
What we need, instead, are products that are sold only after ensuring they are appropriate for the investor. This is a valid point, but my submission is that the problem of suitability cannot be solved by the mutual fund industry. It is a problem that needs the attention of a skilled and competent adviser. Fund managers cannot, and should not, do the job of an adviser.
Consider a simple need to save for the education of a child. This need is common, holds high emotional appeal, and is attractive for a service provider to tap into. How does one create a solution that is suitable for this need? The investor has to first set aside regular savings for this goal. Then, an estimate of the return on investment is required. Given the amount needed for higher education, and the sum that the investor is capable of saving, the desired rate at which the investment should grow has to be estimated.
The investor can achieve this rate through various means. From buying a house, which can be sold 18 years later when the child goes to school, to buying gold on every birthday, to investing systematically in an equity fund, or opening a recurring deposit account, the investor has various choices to reach the desired destination.
However, not all choices may be suitable. The capacity to save and the ability to take risks may vary. A combination of various choices, which is asset allocation, is arrived at. This depends not just on achieving the desired rate of return, but also on how much time is left before the child gets to college, and how much risk the investor is willing to bear without being flustered and worried.
Assume that the investor decides to invest in a combination of a PPF account, equity fund SIPs, debt fund SIPs and gold. Next, he has to choose the specific productsto invest in. These choices need to be reviewed to ensure that they are working well and are generating the desired return at the specified risk. As the goals of the investor draw near, the allocation has to be modified.
While a higher investment in equity seemed a good decision with 18 years to achieve the goal, the invested amount has to be shifted to debt as the time to realise the money draws closer. If growth is the objective in early years, capital protection is the objective in later years.
My argument is that the above process, which represents the tasks a financial adviser will perform in order to meet the specific needs of an investor, cannot be replicated by a mutual fund. Let us assume that a mutual fund or even an insurance company offers a product called a children's education fund. What this product will typically do is combine equity and debt in a portfolio and offer it as a 'solution'. A Ulip will add insurance to it. Some may add a bit of gold to the solution. However, it may still not be a 'suitable' product.
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