Reinventing Mutual fund marketing....

EQUITY IS A DOUBLE-EDGED SWORD
While equity can provide a ‘kicker’ to returns when the equity markets are booming, it can also substantially cut into the returns in bad times. Equities, by their very nature, are volatile compared to debt and are capable of introducing substantial volatility into the returns of MIPs. Hence, an investor in MIPs, whose needs are regular income and stable returns, is inadvertently being exposed to the riskiness of equities which he/she never intended to.

How severe can be the volatility in returns introduced by equities?
Table 2 shows the volatility of two well-known Equity Indices, Sensex and BSE 100, over the last six years; which acts as a good proxy of the expected volatility in equity returns. As we see from the Table, BSE 100 fell by as much as 46 per cent over two consecutive years (2000 and 2001) before rising again in 2002.

What could be the impact of this volatility on MIP returns?
Consider a sensitivity analysis with two MIP schemes with a beginning value of Rs.10 - MIP A with 85 per cent in debt securities and 15 per cent in equities; and MIP B with 75 per cent in debt securities and 25 per cent in equities. Consider a very plausible scenario where equities fall by 25 per cent and debt gives an average return of 6 per cent in a year.
The returns of the two MIPs are given in Tables 3 and 4 respectively. As we can see from Tables 3 and 4, the overall returns get severely eroded to yield an average return of just 1.35 per cent per annum for MIP A and most alarmingly, a negative return (capital erosion) of (1.75 per cent) per annum in the case of MIP B! Imagine the reaction of a retired person who is looking for a regular monthly income, when he receives such returns from his Monthly Income Plan!

NEED FOR PROPER SEGMENTATION AND
PRODUCT TARGETING
It is common knowledge that right marketing involves proper segmentation of the market and targeting products designed to meet the specific needs of the chosen market segments. The common segmentation variables are geographic, demographic, psychographic (lifestyle, personality etc.) and behavioural (benefits, usage patterns, attitude etc.)
At the broad level, the mutual fund market can be segmented based on risk appetite of the investor into risk averse and risk taking investor segments. In India, the risk averse segment is a much larger segment as is evidenced by the high and consistent demand for fixed income products. The risk averse segment can be further segmented based on specific benefits or needs such as regular income, children’s education needs and so on. If MIP is targeted to meet the need of regular income for investors as is evident from the MFs’ communication, then it is not targeted correctly due to the risky equity component as illustrated in
Tables 3 and 4.

INTERNATIONAL SCENARIO
Global Assets Under Management (AUM) have risen to US $ 38.2 trillion in the first half of 2003, according to Cerulli Associates’ latest Global Update report. In the US, from a 1949 base of $2 billion, fund assets soared to about $20 trillion in 2003, a compound growth rate of over 18 per cent5. There is a mind-boggling array of schemes offered by the US MF industry totaling more than

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