May 18, 2018

New Scheme Names, New Investor Concerns: What Should You Do?

Amit Trivedi

Owner, Karmayog Knowledge Academy

New Scheme Names, New Investor Concerns: What Should You Do?

SEBI issued a circular directing the mutual fund companies to categorize the various schemes in certain standard ways. The circular also decided the number of categories. Barring a few exceptions, an AMC can have only one scheme per category.

The objective behind these guidelines was to simplify the classification of mutual fund schemes and to avoid confusion arising out of too many schemes that looked similar. While the objective was noble and the guidelines serve the purpose quite nicely, there is a side effect of this.

There is no change in the way some of the schemes have been managed. However, with the new categorization, the mandates have become narrower. This means that the investors would get a communication giving them exit option without exit load since there is a change in the fundamental attributes. Let us elaborate this situation with an example.

Let us say that there is a debt mutual fund scheme that used to invest in short maturity papers and used to take credit risk. However, the scheme offer document allowed a much wider scope and did not specify the limits to the credit risk. This means that the scheme would be invested in high-quality papers or it could be invested in lower credit quality papers based on the fund management team’s views.

Now with the new norms, the scheme must be classified as either a corporate bond fund that would invest in high credit quality papers or as a credit risk fund, which would invest predominantly in low credit quality papers. This fact must be mentioned in the offer document. The moment the mandate is narrowed in the offer document, the investors must be informed and given an exit option, since this is a change in the fundamental attributes of the scheme.

What should the investor do in such a case? Will the investor give a call to the distributor or simply go ahead with exercising the exit option?

The risk of the investor exiting the scheme is even higher since in the last few months interest rates have inched up, due to which many schemes are showing negative returns or very low positive returns.

Opportunity to get in Touch:

Well, this presents an opportunity to a mutual fund distributor or an investment advisor to get in touch with the clients and reassure them that in many schemes, like the example shown above, there is actually no need to take any action. In the above example, the scheme was always managed as a credit risk fund, even before SEBI issued the said circular. On the other hand, you may need to ask your clients to shift money from some of the schemes, if there is a major change in the scheme’s structure.

As mentioned earlier, this is an opportunity to get in touch with your clients. The idea is to engage them in a conversation regarding their investments. There are two benefits:

1. You showcase that you care for your clients, and
2. Any connect demonstrating that you care, helps strengthen the relationship with the clients.

The Homework that you need to do:

Before you approach your clients, you got to do some homework. This requires preparing the communication and any recommendations on the future course of action. Let us break it down step-by-step:

• First of all, go through the schemes that you have recommended to all your clients. Check the software that you maintain in your office to download the list of schemes where any of your clients’ money is invested. If you are not using any software (we strongly recommend that you must use one), go through the brokerage statements to list down the schemes.
• Then rank the schemes in terms of the AUM as well as the number of clients that you have. We are not referring to the scheme AUM here. It is the quantum of money that your clients have invested – or your clients’ combined AUM in the scheme.
• Now check the changes in the respective schemes. You may go through the communication that the AMCs have sent or anything else that you may have access to. Start at the top of the list, i.e. with the schemes having larger AUM (your clients’ AUM with the schemes) and the larger number of clients (your clients who have invested in the scheme).
• Using the communication as mentioned in the previous point, you may want to prepare your own communication – scheme-wise. Include the suggested course of action that answers some of the following questions:
  • Should the investor exit the scheme or stay put in the scheme?
  • Should one continue a SIP / STP / SWP or is there a need to change the scheme?

The Communication Process:

This makes you ready to start the communication process.

You may combine two approaches – (1) mass communication through letters and e-mails, and (2) personal communication through meetings and phone calls. How to communicate with whom should be a function of how large or important the client is versus the cost of communication. Obviously, personal visits and phone calls cost you in terms of your time – the most valuable resource that you have and not just money.

The communication must be very specific – the investors should get communication only with respect to the schemes one has invested in. There is a huge risk of creating further confusion in the investor’s mind if someone gets communication regarding schemes one has not invested in.

The message is simple: Any major change should be embraced as an opportunity to connect with your clients. It is an engagement opportunity. However, prepare hard before you go and meet your clients.

Use this opportunity to also:

1. Communicating about your processes of recommending schemes to your clients,
2. Asking for any changes in the clients’ situation, which may lead to changes in the portfolio
3. Checking for any possibility to get more investments from the clients