How is the increasing proliferation of direct plans and the new age platforms changing the dynamics between the three key stakeholders - the investors, the distributors, and the manufacturers (AMCs)?
A recent research from CIRANO, Canada, which is a collaboration of researchers from different disciplines to produce and transfer high value-added university knowledge, states that there is a definite increase in wealth for investors who are engaged with an investment advisor. A key takeaway being, the longer the association, the larger the increase in wealth compared to unadvised investors. New-age digital platforms provide advice as a layer over transactional convenience using direct plans. This suits a growing segment of digital-first consumers and perhaps, as a reflection of time on hand and increased savings given work-from-home protocols, this has reflected in higher volumes for the industry in recent times. I suspect that this increased activity will continue to hold till we go past that point of peak re-opening of offices. So far so good for manufacturers.
For investors, whether or not the investment choices themselves are appropriate is an entirely different aspect and anybody's guess. The clue perhaps lies in the research cited above, which says that the probability of increasing wealth has to do with the length of time one spends engaged with one's advisor. On this count, those engaging a human rather than a machine are likely to do better. Machines are good at memory, speed and stamina. Humans are better at judgement, creativity and, according to me, all the important aspects of empathy. The BCG asset management survey 2021 that cites this points to advantages of leveraging both. Having said that, current penetration levels make it possible for all business models to co-exist and complement each other. While investors have the freedom to choose what suits them best, my personal experience has been that having a trusted and competent advisor reduces financial anxiety and gives one a sense of financial freedom by navigating the chaos of information and options around us.
For distributors, much like for investors, options have increased manifold. Tech-enabled solutions for various aspects of the business are no longer as expensive as they once were. The winners in this space are those that have their primary focus on the kind of client segment that they are best suited to serve and adopting digital solutions that make the financial journey for their clients as frictionless as possible. Current regulations do not favour a large majority of distributors who may want to offer both direct plans and regular plans to the same client. But I am confident that this will evolve over time to the benefit of all. Till then, digital platforms are likely to serve the bottom of the pyramid better and traditional distributors will continue to migrate up the value chain. Many new interesting models are evolving up and down the value chain though and in more developed markets, digital players are going 'phygital,' i.e., physical + digital, and many traditional distributors have transformed digitally too. The last word on this has not been written yet.
The precipitous fall in interest rates has spelt big trouble for regular income seekers. Do you think the fund industry can better serve this investor segment and in a cost-effective manner? What's your big idea to solve the investors' income problem?
A fall or rise in interest rates is linked to inflation and as long as one is earning an income or return that is above inflation, then in a broad sense, there is less to worry about. The problem with this statement (and most other general responses in any media) is that it doesn't help. That is because it does not apply to everybody. To elaborate, what inflation are we talking about? The CPI? That's nice to read in a newspaper but your household inflation is likely to be very different from mine. I have two children, of whom one is studying abroad and the other is getting ready for the same. Education inflation is very high. Your kids are probably settled but you may have elders at home who need medical attention and medical inflation is high too. A third problem is taxes. Earning income higher than inflation is fine but is it in positive territory after paying taxes? A fourth problem is more technical. If you are retired and adding to income, you must be able to live on the income that is derived from the difference of inflation and return. This means if inflation is, say, 5 per cent and you are earning, say, 7.5 per cent, then your withdrawal rate should only be 2.5 per cent (7.5 minus 5 per cent), else you risk eating into your principal over a time frame. In more matured markets, investors are fine with it since they don't consider leaving money for their children as a high priority.
The fund industry can definitely serve investors on this count. The funds suited for this are the hybrid conservative and equity savings categories. The big idea for this at PGIM India is our equity savings fund. While it allows to hold equity stocks up to 40 per cent, we have pegged it at 15 per cent to 20 per cent. The balance around 50 per cent is in arbitrage. This has two advantages. One, arbitrage is reset or rolled over every month, so if interest rates rise, it adjusts upwards better. Second, with arbitrage and equity adding to 65 per cent, the category is taxed like equity funds and you pay 10 per cent tax on gains post one-year holding (rather than having to hold for three years as applicable for the hybrid conservative fund). The balance 35 per cent of the fund is in high-quality fixed income. So you now have a portfolio profile that has 15 per cent equity and 85 per cent that has the profile of fixed income. Over a medium time frame, this strategy we believe can deliver a return to investors that is durable compared to say chasing a credit-risk fund. The risk here is from equity that is readily understandable by investors, unlike the risk from credit. Additionally, the equity portion is only exposed to large- and mid-cap stocks. The category typically charges equity like expenses but our expenses are much lower in the regular plan.
So, for investors, it's best to consider what is in their control. Selecting a good advisor is one. Selecting an appropriate strategy like the one described above by understanding the risk and reward is another. Inflation seemingly isn't but the one thing that definitely helps and is in your control is taking care of your health. Good health helps reduce various expenses over longer years of your life and helps you enjoy your income too.
- Investment guru/manager you admire the most: Our CIO Srinivas Rao Ravuri and my previous boss S Naganath. I didn't have the vantage point or personal experience with other gurus. They are a perfect combination of knowledge, experience, pragmatism and the ability to bring the best out of their people, not just investments.
- Business leader you'd like to emulate: Brian Chesky of Airbnb for being an empathetic leader, authentic and innovative - unbeatable combination.
- The most rewarding financial investment you've ever made: The best investment is in oneself. But paying financial-planning fees to get our family financial plan done from a registered investment advisor was the best.
- Money mantra you swear by: Has to be at the minimum to beat inflation and taxes, but the best route to wealth is to keep good health.
- If not a money manager, you'd be: In the Army