Getting Clients To Move From Direct Equity To Equity Mutual Funds

Indian economy is a growing economy - a land of opportunities. We have multiple investment avenues and we have both domestic and global investors tapping the growth opportunities. Indian investors have some typical shared characteristics. Indians have a high savings to total income ratio. These savings are directed towards various investment options. A major percentage of the investors invest in debt asset class through products like PPF and Fixed Deposits. We also give huge importance to gold in our homes and lockers. Many invest in traditional insurance options as well. A small number of investors among them are exploiting the potential of our country by investing in equities. These equity investors invest either by investing directly through a broker's terminal or by investing in an equity mutual fund.

This article concentrates on the former chunk of people who invest in equity stocks directly. Direct equity investors is an alluring segment, because here people believe in the underlying asset 'Equities', these people are not restricted to traditional investments and hence an eye opener is not required. But the difficult part here is pulling these investors out from their comfort zone to exploring a more organized, 'Equity Mutual Fund' option. Most direct equity investors are just skeptical about Mutual Funds, and the reason for their disbelief is inadequate or false information about the product.

The equity investors invest on their own and most of them have a portfolio of their few favourite stocks. These investors buy and sell frequently, based on market movements, their gut feeling and on the advice given on the business news channels. These investors are risk takers, they enjoy the thrill of picking stocks on their own, they do have knowledge of the markets and they are optimistic about their investments. So the major challenge for the advisor is dealing with their psychology, and explaining to them that there is a better way of investing in equities.

So, what do you tell the direct equity investors so that they are convinced to explore the Mutual Fund option.

• Performance: So, your first point would be performance of Equity Mutual Funds. You have to explain to the client that his investment product and amount remains the same, but routing the investment through Mutual Funds, would yield better returns. Though the underlying asset is the same, yet Mutual Funds have always performed better than the markets. If you look at the past 15 years' performance, the average of diversified equity schemes have given a return of 20.86%, while Sensex's return for the same period remained at 15.20%. (Data as of 31^st Jan 17).
• Professionally Managed: Your second contention would be, Mutual Funds are managed by experts. There is a fund manager and a full fledged research team, and these people have the knowledge and expertise and after long brainstorming sessions, stocks are selected on the basis of the investment objective of the scheme. Further buying and selling and overall management is also in the hands of these professionals. The investor don't have to worry about stock selection, tracking the performance etc., he just has to invest and relax. When an investor goes by the direct option, he might choose the wrong product, he might make wrong decisions based on emotions or wrong information. But when the essence of so many wise brains is going into it, erring is a seldom phenomenon.
• The Cost factor: The next major factor to switch from direct equity investing to equity mutual funds is the cost associated. In Direct investing, every time you hit a purchase or sale button, you have to pay a commission irrespective of you making a profit or not. In Mutual Funds, the expense percentage is very nominal, and there are upper limits fixed to the expenses that can be charged to the scheme.
• Diversification: The next point in your pitch would be Diversification. A mutual fund has a huge corpus, and it is spread across multiple sectors, and classes of stocks. So, if your investor has invested say Rs 1 Lakh in equities, he might have diversified among 5-6 stocks at the max. But by investing in a Mutual Fund, he gets exposure to at least 30-40 stocks of different sectors and classes with the same investment of Rs 1 Lakh. And because of such extensive diversification, risk is minimised to a large extent.
• SIP: Another major reason which investors might find attractive is the SIP option of investing. You shall acquaint the investors with the benefits of SIP investing in terms of both better returns as well as convenience of investing

The direct equity investment segment is a big opportunity for the advisors, as they do not need ice breakers, they are optimistic people and are not risk averse. So, add these people to your client base by targeting the right spots.