Client Objection Handling

I surely understand your concern. Let me tell the reasons why it doesn’t make sense to make changes to your investments currently.

– Every fund is different. The philosophy of a particular fund and the underlying investments could be different as compared to other funds. This may result in differential performance during a given period of time.

– We also cannot compare a midcap fund with a large cap and vice-versa. It may so happen that there is a recent rally in the large cap stocks and so your midcap fund may show under performance when compared with large cap. We need to compare apples to apples.

– Sometimes, you may even notice that your fund is not performing when compared with the peer group. While this definitely needs review but it may not be the reason enough to exit from your fund and invest elsewhere. Ideally, one needs to wait for at least 3 years before deciding to exit. If a particular fund is under-performing the peer group year on year basis for 3 years, it is signal to exit from the fund.

– Mostly, the fund recovers after a few bad quarters. Fund managers regularly reviews the portfolio and if required, they change the underlying investments. This may reflect in improved performance going forward. So, one should wait a little longer.

– It is rare that a particular fund is always on the top. Their rankings keep on changing. It might so happen that if you exit an under-performing fund and enter a top performing fund, the situation reverses in the next few quarters and your previous funds becomes a top performance and the new fund under-performs. So, one should not be in a hurry to exit.

– We should also consider exit loads and taxes before exiting a fund.

– I am regularly reviewing your portfolio and if required, I will suggest when to make necessary changes.

I fully understand your concern. These are tough times as equity markets are not doing well. However, I would like to bring to your notice the following :-

Primarily, there are 3 main asset class where you can invest. Let us understand them:-

1) Real Estate – As you know, real estate investments are currently not doing well. It also requires huge investments. It is illiquid also. I don’t think this is a great time to invest in real estate.

2) Bonds – You can consider to invest in fixed income products like bank FD, company FD, debentures, govt bonds, etc. Even mutual funds have debt schemes. I deal in these products and if you like them, I can suggest you some options. While you should have some exposure in fixed income products as an asset allocation strategy but considering your profile, it is not a good idea to have over exposure in bonds. Their returns are not very exciting. Also, most of them carry high tax on income. While they look attractive when equity markets are not doing well but if you are considering investment for  5-10 years and above, they may not be a great option to invest in. If you think, you will convert your bond investments to equities when markets recover, it happens only in hindsight, not reality.

3) Equity – Equities offer the best returns in long term. Yes, they are volatile and can give negative returns also in the short term but it makes sense to stay invested. When you invest in equities through mutual funds, they are safer than other forms of equity investment because of expert fund management and excellent processes that they follow. Don’t just look at last few year performance. I will show you the long term performance of the schemes in which you have investments. It is very decent. These are not very good times. Wait for a few more years and I think your investments will do well.

Most other investment options which you see in the market falls in one of the above category. It may just be structured differently. So, there aren’t really many investment options, just a variation of debt and equity.

I know it hurts to see poor returns in the portfolio and when you compare it with last 1-2 years of FD return, it pains even more. But if you hold your investments for many years and look back, you will find that these investments have done far better than FDs and you will be happy that you continued in equity  mutual funds.

Yes, it is very challenging to handle this objection. First of all, an advisor converts the clients fd into debt funds and then it under performs.

This could be your response to clients:-

  • These are tough times. I understand your concern. Due to unforeseen hike in interest rates in the country, debt funds are under pressure. (explain the inverse relationship between interest rates and bond prices).
  • However, there is a positive development also. Since interest rates have gone up, the yield to maturity of debt funds have also gone up. This means, if you hold for another year or two, your return is expected to go up. Currently, in most debt funds, YTM after management fees is much higher than FD rates. If you continue to hold, you will get this benefit.
  • If you hold your debt funds for 3 years, it qualifies for indexation benefit and lower capital gains tax. Your tax liability can reduce by upto 65-70% (if you are in 30% tax bracket) if you continue to hold. Because of this, even if the returns are equal to FD in 3 years time, you get better post tax returns.

 

This should be your response to clients:-

  • Yes, it is true that Ulips are tax-free and mostly, they also have lower fund management charge. However, this is not the whole story. You must consider other facts.
  • Ulips are not fully investment product. They carry a component of life insurance (min 10 times to be tax-free). This component has a cost as mortality charge. This reduces your overall returns. Most Ulips come with some upfront cost (entry load) and they also have some minimum fixed annual maintenance cost. This also impacts your total returns. Because of such charges, the break-even point of a ulip policy vs mutual funds is between 7-10 years in most cases. Ulips score in costs only if you consider investment for more than 15-20 years.
  • If for any reason, performance of a particular insurance company is not good, you don’t have a choice to redeem easily and switch to another insurance company’s Ulip. In mutual fund this is very easy.
  • While a few Ulips may have done well in performance, mutual funds have done far better across the universe.
  • Yes, lower recurring cost and taxfree nature of maturity are positives for Ulip and you may consider a small investment diversification in Ulips if you are also looking for life cover. But given the track record of mutual funds, a larger portfolio should be allocated towards them.

This should be your response to clients:-

Yes. When you invest direct, you can reduce your cost. But it is not as simple as it sounds.

Expertise
I know my subject well. I keep myself updated with the developments with respect to your investments. There are thousands of schemes to choose from. I do all the hard work to select the best schemes for you. I am sure my suggestions will help you make more money than the additional cost you incur on hiring me.

Service
I give you great service. I and my office are always at your service. While it may not be evident but it costs money to provide excellent service. Timely service adds great value.

Review
I review your portfolio regularly even when you are not aware. I do this as a routine for all my clients. Review doesn’t always mean action. I suggest you changes/action only when necessary.

It’s mutual
I can grow only if my clients grow and stay with me. Therefore, I make sure that I give you the best advice and service so that you stay with me for long term. I try to do my best so that you get much more value than the cost you incur. Unless I do this, I won’t be able to retain you. So, I work hard to ensure that I give you much more value in return. It’s mutual. My life depends on my clients and so you can expect that I will do the best so that I have you as my client long term.

Protection
I protect you from taking wrong decisions. I manage your emotions which can drive you to make mistakes. A great amount of value is added when I say ‘no’ to many things which you/investors want to do which could negatively affect the portfolio. It is difficult to put a price to this.

Limited clients
I work with limited number of clients so that I can give my complete attention to them. This means I am betting my life on the clients that I have.

Other investments
Being associated with is beneficial in many other ways. Apart from mutual funds, I answer your queries on several other day to day investment queries that you may have. You get authentic response from me. I solve many other issues that you face with your investments.

24/7
With me, you have a person who is available to serve you 24/7 for years and decades to come. Today, you may think you can do it yourself but tomorrow you may again need someone to advice you. You may find other advisors but trust factor may be missing. With me, trust is already established. The cost you incur on my services is a very small price to pay for my integrity, expertise, service and trust.

This should be your response to clients:-

  • Ofcourse. I agree. Business mostly gives better returns than other financial investments. But, there are some strong easons why you should consider savings and investments beyond your business.
  • Comparing business and investments is not correct. In business, you invest both money and your time. You work hard for 8-10 hours every day. That is why businesses give higher returns. With investments, you don’t have to invest your time and effort.
  • When you save and invest in mutual funds, you safeguard your future. I am sure you must have some insurance policy or PPF. They offer lower returns but still people do them. The reason is safety and long term savings. Every investment is not meant just for high returns.
  • When you save money through mutual funds, you buy peace of mind for your future years.

This should be your response to clients:-

  • This is not entirely correct. All mutual fund schemes are not risky. All schemes do not invest in shares. There are all kinds of schemes and options in mutual funds. for eg. There are liquid funds which have very low risk. They are very liquid investments and you can redeem even after 1 day. These funds are very good alternative for savings bank and current account. Around 20-25% of total mutual fund investments in India account for Liquid Funds.
  • Then there are debt funds. They also don’t invest in equity markets. Including liquid funds, around 60% of mutual funds assets are in debt funds. You can invest here. These funds are good alternative to fixed deposits and savings bank account.
  • Then you have balance funds which have a combination of debt & equity. They do have investments in equity markets. While in the short term they can give negative returns but you may consider these funds if you are looking for capital appreciation over medium to long term. Around 10-15% of mutual fund assets are in balance funds.
  • And then you have equity funds. As the name suggests, they invests in equity markets. These funds can have high volatility but you can also expect higher returns if you invest for long term. Out of total mutual fund industry size, only around 30-40% of assets are in equity and balance schemes.
  • You can choose the funds depending upon how much risk you want to take. Remember, over 60% of investments in mutual fund schemes do not have any investment in shares.

Note : Do give proper disclosures as suggested by regulators

This should be your response to clients:-

  • Yes, property gives good returns but not as much as you may think. Also, the holding period of property is generally very long. If you hold equity funds that long, its return may beat property. Some property gives excellent returns but many others give poor returns.
  • As a whole, returns in property average out. People say that land investments give great returns but they are also very risky. Also, property is illiquid. Equity funds have high liquidity (funds are credited in 3 working days). Property can have legal issues. Equity funds are free from it.
  • Property has high tax implications. Equity funds have lower tax (10% after one year ). Off late, property is not doing well. Prices have in fact gone down in many cases even after holding it for many years. So, it may not be always true that property gives higher returns.
  • Property generally involves high amount of investments. As against this, you can invest any amount in equity mutual funds. If you choose to invest through SIP, the risk can come down and you may not have to invest lump sum too.
  • I am not saying that you should not invest in property. All I am saying is that you should consider investing a part of your money in equity mutual fund schemes. This will diversify your investments. There past track record is exceptional.

Note : Do give proper disclosures as suggested by regulators

This should be your response to clients:-

  • Yes, you are right. There are no guarantees of returns in mutual funds. The regulator of mutual funds doesn’t allow this. But if you know why this is, you will understand better. Let me explain.
  • You see, it is your money and you have a choice of over 5,000 schemes to invest in. You can choose equity funds, debt funds, liquid funds, balance funds, sector funds, etc. Mutual funds simply act as a bridge. They offer you convenience of investing as per your choice. The total gains (and losses) are yours. They don’t keep any excess profit with them. So, the question of guarantee doesn’t come. They only charge you a small fee to provide you the service.
  • Mutual funds are just a pass through vehicle. They don’t take money from you for themselves. They simply invest it on your behalf as per your chosen objective. Whatever they earn or lose, they give it back to you after deducting a small fee.
  • If you see past track record of mutual fund schemes, you will find that mostly returns given by them is superior than other comparable guaranteed income products like fixed deposits, corporate bonds, etc. In fact, they also benefit from the economies of scale.
  • If you look at the size of mutual fund industry, you can find that millions of investors – both individuals and top corporates, are investing in mutual funds. They must have assessed the benefits of investing through mutual funds rather than directly in guaranteed products.
  • You can begin with a small amount and see for yourself how it works. Once you are comfortable, you can increase your investments.

Note : Do give proper disclosures as suggested by regulators.

This should be your response to clients:-

  • If you have invested in debt funds, you don’t need to worry. The volatility in debt funds is low.
  • You should be a bit concerned only if you have invested in equity oriented schemes. However, there are ways you can reduce the risk so that you are not exposed to high risk in the year in which you need funds.
  • Suppose, you need funds after 15 years. In this case, you should increase the frequency of reviews after 10 years. If markets are good and your returns are decent, you can consider booking profits in tranches by switching to debt funds so that you are not dependent only on the 15th year.
  • Also, you should not have all your investments in equity funds. You should also consider debt oriented funds and balance funds. A proper asset allocation will greatly reduce your risk.
  • Since I am associated with you, I will also monitor your investments and help you with the right strategies.

Note : Do give proper disclosures as suggested by regulators

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