marketing of mutual funds
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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.
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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.
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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.
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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.
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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.
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How do you discover
customers needs ?
How do you create solutionsfor customers needs ?
That is what we are going to study now.
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Discovering
customersneeds.
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Dimensionsare the characteristics or
features of the product,which make the individual
or the household buy theproduct.
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Drivers
are the motives or reasons,
which make the individualor the household buy the
product.
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Return
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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.
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What drives theinvestment ?
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Transactions
driverPrecautionary
driver
Income
driver
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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.
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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
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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.
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Age 25 Age 75
Expenditure
Income
Excess of income over
expenditure
Excess of expenditure
over income
Excess of income over
expenditure
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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.
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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.
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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.
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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 !
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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.
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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.
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Having understood the motives
that drive a person to invest,
how to choosethe mutual fund ?
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Return
Risk
Liquidity
Transactions
Precautionary
Income
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High Low
Return
Risk
Liquidity
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High Low
Return
Risk
Liquidity
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High Low
Return
Risk
Liquidity
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High Low
Return
Risk
Liquidity
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High Low
Return
Risk
Liquidity
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High Low
Return
Risk
Liquidity
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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.
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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.
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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.
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How do you turn your
mutual fundsinto solutions
for customers needs ?
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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.
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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.
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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.
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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 ?
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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.
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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.
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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.
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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
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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
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Alternatively we can use the excel
formula.
Open an Excel sheet.
Open the drop down Formulasmenu.
Choose the Financial Funct ions.Formulas menu
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Choose the function PMT.
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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
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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)
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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
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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
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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
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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.
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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
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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.
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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
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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
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Choose the function FV.
Alternatively we can use the excel
formula.
FV
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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)
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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)
Alternatively you can use a Cash Flow
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Alternatively you can use a Cash Flow
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
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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)
You can do the Sensitivity Analysis also by
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You can do the Sensitivity Analysis also by
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)
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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.
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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
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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 ?
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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.
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Marketing mutual funds, is
marketing dreams.
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