Himanshu shares five key traits that underpin long term success of any mutual fund product. In a discussion around products that are relevant to Indian markets and Indian investors, he shares rich insights into what works and doesn't work in Cap Pro funds, derivate strategy based funds and advice embedded funds. There is no right or wrong fund, he stresses, but there is clearly a question about what is suitable and what is not, and all stakeholders must work towards delivering suitable products to their investors.

Equity Insights, a joint initiative between Franklin Templeton Investments and Wealth Forum, seeks to share insights that can enable us to collectively position equity funds better and help investors gain the true long term wealth creation benefits of equity investing.

In a nutshell

WF: Over the last 12 months, buoyant equity markets have been drawing in lakhs of retail investors into equity funds, many of whom are first time MF investors. What is an appropriate product strategy that a fund house must pursue in such times and what are appropriate retail oriented funds that distributors must focus on in such times?

Himanshu: It is often said that a crisis should not be wasted. But when it comes to equity markets, even the good times should not be wasted. Good times are an opportunity to educate the retail investors about the virtues of long term equity investing. The message doesn't change much, but people tend to listen when the milieu is pleasant. The process of handholding in the times of downturn must also be followed with as much rigour.

We believe that this opportunity should be utilized to bring forward simple diversified products that have been there and that have proved themselves through the peaks and the troughs. Rather than being too thematic, the focus should be on good old diversified multi-cap funds. Further, emphasis should also be on a systematic approach and the perils of timing the market should be underlined.

WF: Is there merit for a fund house to consider product strategies that dissuade small investors entering into higher risk equity products like thematic funds, sector funds and small cap funds and gently nudge them towards diversified equity funds and large cap funds? This could for example be done by raising the investment threshold in higher risk products.

Himanshu: I agree on the fact that the communication should be structured so that investors tend towards diversified and simple solution products. So there could be a merit in slightly differentiating them through exit loads and slightly higher amounts. The idea is not to make them inaccessible, but to underline a different risk quotient.

A fund house may have a variety of products across the risk spectrum, but the focus should be on persuasion, and never on dissuasion. There is no right or wrong fund; it is more of a question of suitability. So while communicating with mass distribution channels and retail investors we should highlight products that are most likely to work for most of the investors.

WF: Are there any international best practices from a product construct point of view that we should embrace, which guide retail investors to appropriate products?

Himanshu: Longevity and vintage of successful products is a good indicator of what should be observed while constructing a product. The central idea is that the product should work for every stakeholder for it to succeed in the long run. This is a necessary though not a sufficient condition. One can identify at least five important traits of a product to be successful in the long run -

(a) Relevance (across market cycles),

(b) Genuine differentiation (in terms of Risk-Return-Liquidity matrix),

(c) Viability for all stakeholders,

(d) Structure that is efficient and

(e) Fund house's ability to add value

This may not be an exhaustive checklist, but most of the international best practices factor these aspects in one way or the other.

WF: Capital protection oriented products where the equity component is invested in the F&O segment to derive higher equity participation, while protecting the downside, is seen by some experts as a great solution for retail investors and by others as a needless level of complexity for them. What is your take on their suitability for retail investors?

Himanshu: As mentioned earlier, there is nothing wrong in having a complex anatomy for a product, as long as it is presented in a simple manner to the end investor. Capital Protection may be a good structure to offer for certain situations and outcome expectations when downside protection is the primary requirement.

But it should not be interpreted as a general "solution" product for the retail investors. Retail investors generally prefer wealth creation, where long term 'real compounding' and net long position in wealth creating asset classes are a precondition. Capital Protection funds in the prevalent form, ignore the time value of money, and lead investors to look at only the dictionary meaning of capital protection, not economic.

It is easy to see that Capital Protection is a convenient sell, especially in India. But in the interest of the retail investors at large, we should advocate asset allocations for long term horizons and let the investor benefit from the outcomes.

WF: Advisors are best placed to help investors follow a disciplined and long term oriented approach to equity investing. However, given the dearth of advisors in the country to serve retail investors, what solutions from a product construct point of view are best placed to help achieve this?

Himanshu: The role of a financial advisor is much beyond guiding investments in a particular asset class or product. A financial advisor has a role that requires managing client's investment behaviour, life cycle stages/goals and the overall financial wellbeing. As Indian investors move up the learning curve and mutual funds gain universal acceptance, the need for an advisor will be felt more acutely.

But given our role, we should focus on solutions for advisors as well as the end investor. An example of such an attempt from Franklin Templeton was Family Solutions (for distributors) and Franklin India Multi-Asset Solutions (for investors). If we are able to create solutions for our advisors that help them in client engagement and product selection, we would be doing good service to our investors.

WF: Are long-short funds and other products that use derivatives to be viewed as complex products best suited only for high net worth individuals or as risk-controlled products that can be considered by all investors?

Himanshu: Broadly speaking, Indian investors have barely started dealing in mutual funds. A lot of work needs to be done in offering simple long term wealth creation products. This basic problem needs greater attention even though there is a niche space for the so called complex products.

Having said that, creating a complex product structure is fine so far as the cost of complexity is identifiable and corresponding benefits can be weighed. But complexity cannot be a sales proposition in itself, and should be strictly seen as a means to achieve an end. Generally communicating all the implications to the end investor is not easy and hence there could be a merit in restricting such products to sophisticated investors.

WF: Times of currency volatility, such as what we are seeing now, remind us about the need to consider global diversification of investor portfolios. Is there a case for considering global diversification as a long term strategy or should it remain largely a tactical strategy as it is now commonly seen?

Himanshu: Diversification is observed in a very narrow sense by Indian investors. Mostly the circle of familiarity is restricted to domestic assets only. However, International investing is a long term approach that is central to creating a well-rounded portfolio for Indian investors. The need for global diversification has not been adequately communicated in India. In fact it is one of the most ignored basic tenets of good investing.

Diversification is not just about buying more, but about buying different. There are following aspects of diversification that can be achieved through international investing

1. Diversification by Asset Class

2. Diversification by Businesses

3. Diversification by Countries

4. And Diversification by Currencies

Unfortunately it is viewed tactically in the times of currency volatility and global risk aversion only. It is high time that our advisors present offshore equity products as meaningful diversifiers to the Indian investors. It should become an integral part of any long term asset allocation.

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