Marketing of Mutual Funds

8/10/2019 Marketing of Mutual Funds

1/71


2/71

Channels for marketing

of Mutual FundsIndependent Financial Advisors (IFA).

Financial products distribution firms.

(National corporate distributors)

Banks

Direct selling by AMCs.

(including online selling)

Though mutual funds can today be purchased through

stock exchange, this does not amount to marketing, as it does not

result in creation of new units.


3/71

Prior to August 1, 2009, the

intermediaries engaged in mutual fund

marketing were paid commission, whichincluded (i) a frond end payment for

marketing of mutual funds, and (ii) an ongoing

payment called trail fee, based on theaverage AUMs during the quarter.

However post the SEBI withdrawal of

entry loads from August 1, 2009, , the upfrontpayment has been drastically reduced.


4/71

The trail fee continues more or less at the

same level.

Consequent to the withdrawal of entry

loads, and the consequent drastic reduction in

upfront commission, the mutual fund

investors are expected to pay a servicefeeto

the intermediary, based on the quantum and

quality of service rendered to them by thelatter.


5/71

The service rendered by the

intermediary to an investor could be basically

of two types :Advisory service : The intermediary may

advise the investor on making a choice of

mutual funds, providing him/her with therelevant information and domain expertise.

Logistic service : The intermediary may help

the investor procure the application forms,execute the documentation and submit the

applications to the relevant points of service.


6/71

The secret of successful marketing of

mutual funds is :Do not market mutual funds,

market solutions.

Or, in other words,

do not begin your marketing with

what you have.Begin with what the customer needs.


7/71

How do you discover

customers needs ?

How do you create solutionsfor customers needs ?

That is what we are going to study now.


8/71

Discovering

customersneeds.


9/71

Dimensionsare the characteristics or

features of the product,which make the individual

or the household buy theproduct.


10/71

Drivers

are the motives or reasons,

which make the individualor the household buy the

product.


11/71

Return


12/71

Return: The rate at which the value of the

investment grows over a period

of one year.

Risk : The extent of variability in returnover several one year periods,

measured by standard deviation

or some other measure of

variability.Liqu id i ty: The ease and cost of converting

any investment into money.


13/71


14/71

What drives theinvestment ?


15/71

Transactions

driverPrecautionary

driver

Income

driver


16/71

Transactions driver

to save and invest arises from the fact

that the t ime patterns of f low of income

and expendi turedo not usually match.

Most of us get our income month ly,but we spend dai ly. Even for those of us

who may be in business or profession our

income does not come in exactly in keepingwith our expenditure.


17/71

Patterns of f low of income and expend i ture

over one month

February 1 February 28

Expenditure

Income

Excess of income over

expenditure

Excess of expenditure

over income


18/71

Similarly the t ime pattern o f earning income

dur ing ou r l ifet ime does not always m atch the

t ime pattern of our expendi ture dur ing ourl i fet ime.

In the early carrier our expenditure is usually

low; as we set up a family and home it increases;

it continues to increase as the family grows and its

requirements increase; it peaks at the time of

childrenshigher education and settling down in life;

and then it may decrease. The income normallyincreases steadily up to a certain age (retirement,

say for instance), and then it may fall sharply.


19/71

Age 25 Age 75

Expenditure

Income


expenditure

Excess of expenditure

over income


expenditure


20/71

In both these cases, because the

t ime patterns of f low of ou r income and

expend i ture do no t match, we need to carrypu rchasing power, f rom when we have more

of i t , to w hen we have less of i t .

Investment is therefore used as astorage of purchasing power, in the short term or

long term.

The driver which causes us to invest

for this motive, is the TRANSACTIONS

DRIVER.


21/71

Precautionary driver

to save and invest arises from the investorsdesire

to provide for an unforeseen event. It is very similar to thetransactions driver. But for a difference : while the

transactions driver makes the investor save and invest for

a foreseen and planned need in future, the precautionary

driver is about anun foreseen need in future.

The investor only feels the existence of a possibility

of a certain event occurring, which may need him to

spend. He does not want to be caught on the wrong foot, if

at all it occurs. And, with that in mind, he would like to

make a provision. It could be a sickness, an accident,anything, or even a desirable event, like an opportunity to

purchase something.


22/71

Points to be noted about the

precautionary driver

we do not know when the event willoccur.

we do not know how much will be

required if the event occurs.


23/71

This driver is not just about not being

caught on the wrong oot

ts all about providing for an

eventuality

Investing for a rainy day !


24/71

Income driveris very different from the rest of the two. When an

investor is saving and investing driven by the first two

drivers, he is trying to carry his purchasing power into

future; investment is for him like a fridge where he can

store his purchasing power or money.

But when he saves and invests for income

driver, he is not trying to carry over his purchasing

power into future; rather, he is trying to increase his

future purchasing power. In other words, his solepurpose in saving and investing is to increase his future

income.


25/71

How does this happen ?

When an investor saves and invests, he

creates a source of income for future. Theincome from this source adds to the income

that he already has, or that he expects to

have in future.


26/71


27/71

Having understood the motives

that drive a person to invest,

how to choosethe mutual fund ?


28/71

Return

Risk

Liquidity

Transactions

Precautionary

Income


29/71

High Low

Return

Risk

Liquidity


30/71

High Low

Return

Risk

Liquidity


31/71

High Low

Return

Risk

Liquidity


32/71


33/71

High Low

Return

Risk

Liquidity


34/71

High Low

Return

Risk

Liquidity


35/71

High Low

Return

Risk

Liquidity


36/71

Transactions driver is about storing and carrying over

time the purchasing power.The investor driven by the transactions motive, does

not seek to grow his purchasing power. Hence return is not an

important consideration for this driver. But the return has to

be sufficient to offset the loss of purchasing power due toinflation. So conservation of purchasing power is important.

Therefore low return, low risk is what is suitable for this

driver.

Since this driver is about planned and foreseen need infuture, that is the time and quantum of transaction is known

with more or less certainty, liquidity is not very important.


37/71

Precautionary driver is also about storing and

carrying over time the purchasing power.

Here too the investor does not seek to grow his

purchasing power. Hence return is not an important

consideration for this driver also. But the purchasingpower has to protected from vagaries of inflation.

Therefore low return, low risk is what is suitable for this

driver also.

But since the time and quantum of transaction is notknown with certainty, liquidity is very important. So for

this driver, liquidity needs to be high.


38/71

Income driver is all about increasing the purchasingpower in future.

So return is of prime importance. And higher the

return one seeks, higher the risk one has to assume. So this

driver calls for high return, high risk investment products.

Since here there is no transaction planned, liquidity

is not very important; except for seizing investment

opportunities. Moreover, high return, high risk investmentscannot come with high liquidity. Therefore one has to be

satisfied with low liquidity in case of this driver.


39/71

How do you turn your

mutual fundsinto solutions

for customers needs ?


40/71

Whatever the driver, the goal of investment

is to create a corpus in future.

Transactions Driver requires us to collect

the excess purchasing power from current

period and store it to meet a future need.

So too the Precautionary Driver.

Income Driver requires us to create a

corpus in future which will become a source ofadditional income.


41/71

In case of Transactions Driver we know

with more or less certainty the quantum of

purchasing power we will need in future; so weknow the size of the corpus we need to create.

In case of the Precautionary Driver we

cannot know with certainty the quantum of

purchasing power we will need; but, depending

on our capacity we usually decide what we

would like to set aside for a rainy day.


42/71

So too, in the case of the Income Driver, our

aspirations set the size of the corpus we would

like to create; the size of the corpus is

determined by the quantum of additional

income we desire to receive in future and our

current capacity to save for that.


43/71

Given the size of the corpus we wish to

create, how do we calculate the amount thatwe need to save and invest month after

month ?

Or, given our monthly savings and

investment, how do we calculate the size of

the corpus that is likely to be created ?


44/71

Let us first learn to how to calculate the amount

that we need to save and invest month after month to

achieve a given corpus.

The amount to be saved and invested every month

will depend on three variables :

The quantum of monthlycontribution.

The period of accumulation.

The rate of return expectedon the monthly contributions.


45/71

To calculate the amount to be saved and

invested every month, to achieve a givencorpus, we can use three methods :

the algebraic formula.

the excel formula.

the excel cash flow statement.


46/71

Given the target corpus required to be

accumulated, the accumulation period and the

expected rate of return, the monthly contribution is

given by the formula :

iMonthly contribution = Corpus X ------------

(1+i)n -1

where i = expected rate of interest / rate of

return per month.

n = number of months in the accumulation period.


47/71

Let us solve an example to understand this.

If Anil needs to accumulate a corpus of

`10,00,013 for the higher education of his daughter,

contributing between age 30 and age 50, how much

does he have to contribute monthly ?

Assume an interest rate of 12%.

iMonthly contribution = Corpus X ------------

(1+i)n

-1


48/71

Let us solve the problem now :i

Monthly contribution = Corpus X --------------

(1+i)n - 1

0.01

Monthly contribution = 10,00,013 X ---------------------

(1+0.01)240- 1

Monthly contribution = 10,00,013 X 1.000987

Monthly contribution = `1,001


49/71

Alternatively we can use the excel

formula.

Open an Excel sheet.

Open the drop down Formulasmenu.

Choose the Financial Funct ions.Formulas menu


50/71

Choose the function PMT.


51/71

Fill in the function arguments (values).

So, the monthly contribution has to be `1,001.

Rate of interest per month

Number of months

Corpus

Monthly contribution


52/71

Or, you can type = PMT(rate,nper,,fv)

in a cell of the Excel sheet. Note that you should

not type rate,nper,,fv, but type the values ofthese variables. So, in the example we have

taken you will type = PMT(0.12/12,240,,1000013)


53/71

Alternatively you can use a Cash Flow

Sheet to do the same calculations. Excel

formulas provide quick answers to specificqueries. Cash Flow Sheet is a little more time

consuming, as it is an iterative process. But the

sheet gives you a visual feel of the corpus getting

accumulated over time; and allows you to modifythe accumulation as you wish.

Let us have a look at a Cash Flow Sheet.

Cash Flow Sheet


54/71

You can use the Cash Flow Sheet also forsensitivity analysis, i.e. for answering questions like :

How much more contribution will I need to make ifI want to increase the corpus by `1,00,000 ?

How much lesser contribution will I need to make

if I begin contributing 3 years earlier ?

How much more contribution will I need to make if

the rate of return falls to 6% ?

Sensitivity Analysis(Cash Flow Sheet)

Y d th S iti it A l i l b


55/71

Sensitivity Analysis(Excel Formula)

You can do the Sensitivity Analysis also by

using the Excel formulas. Enter the values of rate /

nper / fv in the table and get the desired result at the

top, as shown in the sheet below.

L l h l l h i f h


56/71

Let us now learn how to calculate the size of the

corpus that is likely to be created, given our monthly

savings and investment.

The corpus created will depend on three variables :

The quantum of monthlycontribution.

The period of accumulation.

The rate of return expectedon the monthly contributions.


57/71

As before, to calculate the corpus that is

likely to be accumulated, given the monthlycontribution, we can use three methods :

the algebraic formula.

the excel formula.

the excel cash flow statement.

Gi th thl t ib ti th


58/71

Given the monthly contribution, the

accumulation period and the expected rate of return,

the Corpus is given by the formula :

(1+i)n -1

Corpus = Monthly contribution X ------------i

where i = expected rate of interest / rate of

return per month.

n = number of months in the accumulation period.


59/71

Let us solve an example to understand this.

IfAnil saves and invests every month `10,00,013for the higher education of his daughter, contributing

between age 30 and age 50, how much corpus is he

likely to accumulate ?

Assume an interest rate of 12%.

(1+i)n -1

Corpus = Monthly contribution X ------------i


60/71

Let us solve the problem now :(1+i)n - 1

Corpus = Monthly contribution X --------------

i

(1+0.01)240- 1

Corpus = 1,001 X ---------------------

0.01

Corpus = 1,001 X 999.0140

Corpus = `10,00,013

Alt ti l th l


61/71

Choose the function FV.

Alternatively we can use the excel

formula.

FV


62/71

Fill in the function arguments (values).

So, the accumulated corpus will be `10,00,137.

Rate of interest per month

Number of months

Monthly contribuition

Corpus

Or you can type = FV( t t)


63/71

Or, you can type = FV(rate,nper,pmt)

in a cell of the Excel sheet. Note that you should

not typerate,nper,pmt

, but type the values ofthese variables. So, in the example we have

taken you will type = FV(0.12/12,240,1011)



64/71


Sheet to do the same calculations. Excel

formulas provide quick answers to specific

queries. Cash Flow Sheet is a little more time

consuming, as it is an iterative process. But the

sheet gives you a visual feel of the corpus getting

accumulated over time; and allows you to modifythe accumulation as you wish.

Let us have a look at a Cash Flow Sheet.

Cash Flow Sheet

You can use the Cash Flow Sheet also for


65/71

You can use the Cash Flow Sheet also forsensitivity analysis, i.e. for answering questions like :

By how much will the corpus increase if I increasethe contribution by `100 ?

By how much will the corpus increase if I begin

contributing 3 years earlier ?

By how much will the corpus fall short if the rate

of return falls to 6% ?

Sensitivity Analysis(Cash Flow Sheet)



66/71


using the Excel formulas. Enter the values of rate /

nper / pmt in the table and get the desired result at

the top, as shown in the sheet below.

Sensitivity Analysis(Excel Formula)


67/71

Now an interesting question :

You need to turn your

mutual funds into solutions for

customers needs; you use the

power of numbers, as we have

just seen, to achieve that.


68/71

Between sophisticated looking

algebraic formulas, magic Excelformulas and the tedious Cash Flow

Sheets, which of the three would you

prefer to use before a customer to turnyour mutual fund into a solution for

customersneeds ?

Wait a minute; let me rephrase my question You


69/71

Wait a minute; let me rephrase my question. Youare trying to sell a plasma TV to a customer. It isdefinitely a hi-tech piece of equipment. You have a lot

to boast about its technology. And to convince reallyhow hi-tech it is, you open the back of the TV andshow the customer the sophisticated gadgetry it isfilled with.

But the sales man next to you, who is selling thesame model of TV to another customer simply puts ona TV and lets the customer enjoy the experience tohis heartscontent.

Which one of you two is likely to win thecustomer more easily ?


70/71

A Cash Flow Sheet may be very

tedious and boring, but its visualimpact on the customer is powerful.

There, as the customer actually sees

her money growing month aftermonth, it transports her into future;

she sees her dream rolling out beforeher.


71/71

Marketing mutual funds, is

marketing dreams.

Marketing of Mutual Funds

Documents