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Search for a replacement to RBI tax free bonds led us to debt funds
Our firm, Thukral Capital Market (TCM) started its journey in 1994 with tax free bonds. I am a Chartered Accountant, and tax planning for clients is a core proposition for us. Until 2003, RBI bonds were tax free, and represented a good investment option for HNI clients to earn healthy tax free returns. In 2003, RBI bonds became taxable. There was no other on-tap tax efficient instrument available from the Government or PSUs. From time to time, there would be issues which would open for a few days, get heavily oversubscribed and then investors would get refunds and start looking for other tax efficient instruments all over again. After studying the market, I concluded that debt funds are the best instrument available in the new scenario. Our journey into mutual funds began from 2003, with debt funds.
Start the journey with FMPs
I understood that the migration from bank deposits and RBI bonds to mutual funds is not going to be an easy one. You need to find ways of helping investors build their confidence in the product. So, while other mutual fund advisors were busy focusing on equity and a variety of open ended funds, I started with debt, and that too with FMPs. We earned next to nothing in FMPs - but for investors who were unfamiliar with the world of mutual funds, this was clearly the best way to build their confidence. In those days, we could indicate returns. We indicated returns. When clients got their redemption and found they got what was expected, and in a tax efficient manner, their confidence in mutual funds increased. Slowly, we migrated them from FMPs to accrual funds.
Conservative guidance
Even today, after so many years, we hesitate to discuss dynamic bond funds with most investors, except a few who are knowledgeable and have the necessary risk appetite. Accrual funds is what suits most investors - whether HNI or retail. Managing expectations is very critical in the debt funds space. When people move their "safe" money into debt funds, we have to ensure that they come in with expectations that can be met. HNIs consider debt funds as a better alternative to bank deposits because of the tax efficiency. Beyond that, if you get even 1% additional return, that works out to 2-3% higher post tax return compared to deposits - which is what they really want. I never try to overpromise on return expectations from debt funds - whatever seems like a reasonable expectation based on YTM, modified duration and expense ratio, I further reduce a bit and discuss a slightly lower return expectation with my clients. In debt funds, clients don't expect outperformance, they don't want underperformance also. Be conservative in your return guidance. Never disappoint.
Selling without guaranteed returns
It was not easy to convince people to invest in a product that does not guarantee or assure any return. Knowledge and transparency are your best friends when battling the expectation of guaranteed returns. There was a client who I met some time ago - an HNI. I started talking about debt funds. He asked me, "Can you give me a guarantee on return?" I said "No.". He said, "Is there any other assurance on how much I will get?. I said, "No". Then he asked me point blank, "How do you expect me to invest when you cannot guarantee a return?" I said, " I cannot guarantee a return, but I can demonstrate how I have built my conviction on how much this fund is likely to give as return". Then I sat down and took him through step by step about the portfolio construct, its YTM, its modified duration, implications of modified duration and its expense ratio. Then I showed him how I came to my conclusion on expected return by analyzing the portfolio in this manner. I left all the paper work with him, and told him to think about it. When I contacted him 2 days later, he met me and handed over a cheque for Rs. 5 crores for the fund I recommended. He said, "Nobody explained this the way you explained it."
Some distributors shy away from going into detail, they don't like talking about the expense ratio as they fear it will lead to a conversation on their earnings from the expense ratio. My experience tells me that sharing your knowledge and being absolutely transparent build client confidence and trust.
Understand retail investors' pain point
In the retail world, you can't go into such detail, nor do clients want such technical discussions. You have to understand their pain point and see how to address it. For many retail investors, TDS is a big issue. They dislike TDS as it means lengthy processes for obtaining refunds, TDS credits not appearing sometimes in their names in the 26AS statements, follow up for this and so on. When we discuss accrual funds with retail clients, we explain the basics and then inform them that they can expect around the same return that they get from bank FDs - but here there is no TDS. That very often gets them interested in debt funds. Then we tell them that whenever they need the money, it will be available on a T+2 basis. Liquidity is a big comfort.
Dealing with volatility
In 2013, when we experienced a round of debt market volatility, we proactively reached out to clients and explained to them that these are marked-to-market notional losses and our expectation that if held for the long term, these temporary M-T-M losses would be irrelevant for them. Clients reposed their faith and held on, which worked out well for them. Knowledge and transparency again were the key factors that helped us deal with that situation.
Even in the recent bout of worries on corporate bond funds, all we did was reach out to clients, explain the issue and reassure them about their investments. We have not made any material changes in our investment recommendations due to the scare on corporate bonds. We are careful about the managers and fund houses we select, and we monitor portfolios regularly.
The 6th T
We believe in 5 "T"'s : (1) Trust, (2)Trade Knowledge, (3) Technology, (4) Transparency and (5) Tax Planning. We are humbled when clients tell us they believe in a 6th T: Thukral. We are aware of the responsibility this places on us, which is why we always chose to be conservative in our guidance to clients. Our motto is "To multiply investments beating inflation with tax planning".
CNBC TV-18 has recognised our work and awarded us during 'Financial Advisor Awards 2014-15 with Best Performing IFA-(up Country) (Tier-2) North Award.
Today, we serve over 2000 clients with an AuM in excess of Rs. 300 crores - of which debt funds are around Rs.200 crores. We have two offices - in Varanasi and Bhadohi. We don't serve institutional clients - our client base is HNIs and retail investors. Debt funds are the foundation of our business.
We believe in addition to debt funds, liquid funds is a huge untapped opportunity for distributors. We need to communicate to investors the returns and convenience aspects and showcase how technology can make saving very convenient and efficient through liquid funds. Every time banks have extended holidays, which happens a few times a year - there is an opportunity to showcase another aspect of convenience of liquid funds to investors.
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