Channels for marketing

of Mutual Funds
Independent 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.

Prior to August 1, 2009, the

intermediaries engaged in mutual fund
marketing were paid commission, which
included (i) a frond end payment for
marketing of mutual funds, and (ii) an ongoing
payment called trail fee, based on the
average AUMs during the quarter.
However post the SEBI withdrawal of
entry loads from August 1, 2009, , the upfront
payment has been drastically reduced.

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 service fee to
the intermediary, based on the quantum and
quality of service rendered to them by the
latter.

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 the
relevant 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.

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.

How do you discover

customers needs ?
How do you create solutions
for customers needs ?
That is what we are going to study now.

Discovering
customers
needs.

Dimensions
are the characteristics or
features of the product,
which make the individual
or the household buy the
product.

Drivers
are the motives or reasons,
which make the individual
or the household buy the
product.

Return

Return :

The rate at which the value of the

investment grows over a period
of one year.

Risk

The extent of variability in return

over several one year periods,
measured by standard deviation
or some other measure of
variability.

Liquidity :

The ease and cost of converting

any investment into money.

Drivers

Why do we invest in
mutual funds?

What drives the

investment ?

Transactions
driver
Precautionary
driver

Income
driver

Transactions driver
to save and invest arises from the fact
that the time patterns of flow of income
and expenditure do not usually match.
Most of us get our income monthly,
but we spend daily. Even for those of us
who may be in business or profession our
income does not come in exactly in keeping
with our expenditure.

Patterns of flow of income and expenditure

over one month
Excess of income over
expenditure

Excess of expenditure
over income

Income

Expenditure

February 1

February 28

Similarly the time pattern of earning income

during our lifetime does not always match the
time pattern of our expenditure during our
lifetime.
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
childrens higher education and settling down in life;
and then it may decrease. The income normally
increases steadily up to a certain age (retirement,
say for instance), and then it may fall sharply.

Excess of income over

expenditure

Expenditure

Excess of expenditure
over income

Income

Excess of income over

expenditure

Age 25

Age 75

In both these cases, because the

time patterns of flow of our income and
expenditure do not match, we need to carry
purchasing power, from when we have more
of it, to when we have less of it.
Investment is therefore used as a
storage of purchasing power, in the short term or
long term.
The driver which causes us to invest
for this motive, is the TRANSACTIONS

DRIVER.

Precautionary driver
to save and invest arises from the investors desire
to provide for an unforeseen event. It is very similar to the
transactions 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 an unforeseen 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.

Points to be noted
precautionary driver

about

the

we do not know when the event will

occur.

we do not know how much will be

required if the event occurs.

Investing for a rainy day !

This driver is not just about not being

caught on the wrong foot.
Its all about
eventuality.

providing

for

an

Income driver
is 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 sole
purpose in saving and investing is to increase his future
income.

How does this happen ?

When an investor saves and invests, he
creates a source of income for future. The
income from this source adds to the income
that he already has, or that he expects to
have in future.

Having understood the motives

that drive a person to invest,
how to choose
the mutual fund ?

Transactions
Precautionary
Income

Return
Risk
Liquidity

High

Return

Risk

Liquidity

Low

High

Return

Risk

Liquidity

Low

High

Return

Risk

Liquidity

Low

High

Low

Return

Risk

Liquidity

High

Low

Return

Risk

Liquidity

High

Return

Risk

Liquidity

Low

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 to
inflation. 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 in
future, that is the time and quantum of transaction is known
with more or less certainty, liquidity is not very important.

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 purchasing
power 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 not
known with certainty, liquidity is very important. So for
this driver, liquidity needs to be high.

Income driver is all about increasing the purchasing

power 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 investments
cannot come with high liquidity. Therefore one has to be
satisfied with low liquidity in case of this driver.

How do you turn your

mutual funds
into solutions
for customers needs ?

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 of
additional income.

In case of Transactions Driver we know

with more or less certainty the quantum of
purchasing power we will need in future; so we
know 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.

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.

Given the size of the corpus we wish to

create, how do we calculate the amount that
we 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 ?

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 monthly

contribution.
The period of accumulation.

The rate of return expected

on the monthly contributions.

To calculate the amount to be saved and

invested every month, to achieve a given
corpus, we can use three methods :

the algebraic formula.

the excel formula.

the excel cash flow statement.

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 :
i
Monthly 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.

i
Monthly contribution = Corpus X -----------(1+i)n -1

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%.

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

Alternatively we can use the excel

formula.
Open an Excel sheet.
Open the drop down Formulas menu.

Choose the Financial Functions.

Formulas menu

 Choose the function PMT.

 Fill in the function arguments (values).

Rate of interest per month
Number of months

Corpus

Monthly contribution

So, the monthly contribution has to be `1,001.

 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 of
these variables. So, in the example we have
taken you will type = PMT(0.12/12,240,,1000013)

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 modify
the 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

sensitivity analysis, i.e. for answering questions like :
How much more contribution will I need to make if
I 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)

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.

Sensitivity Analysis
(Excel Formula)

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 monthly

contribution.
The period of accumulation.

The rate of return expected

on the monthly contributions.

As before, to calculate the corpus that is

likely to be accumulated, given the monthly
contribution, we can use three methods :

the algebraic formula.

the excel formula.

the excel cash flow statement.

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.

(1+i)n -1
Corpus = Monthly contribution X -----------i

Let us solve an example to understand this.

If Anil saves and invests every month `10,00,013
for 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%.

Let us solve the problem now :

Corpus

(1+i)n - 1
= Monthly contribution X -------------i

Corpus

(1+0.01)240 - 1
= 1,001 X --------------------0.01

Corpus

= 1,001 X 999.0140

Corpus

= `10,00,013

Alternatively we can use the excel

formula.

FV

Choose the function FV.

 Fill in the function arguments (values).

Rate of interest per month

Number of months

Monthly contribuition

Corpus

So, the accumulated corpus will be `10,00,137.

 Or, you can type = FV(rate,nper,pmt)

in a cell of the Excel sheet. Note that you should
not type rate,nper,pmt, but type the values of
these variables. So, in the example we have
taken you will type = FV(0.12/12,240,1011)

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 modify
the 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

sensitivity analysis, i.e. for answering questions like :
By how much will the corpus increase if I increase
the 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

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)

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.

Between sophisticated looking

algebraic formulas, magic Excel
formulas and the tedious Cash Flow
Sheets, which of the three would you
prefer to use before a customer to turn
your mutual fund into a solution for
customers needs ?

Wait a minute; let me rephrase my question. You

are trying to sell a plasma TV to a customer. It is
definitely a hi-tech piece of equipment. You have a lot
to boast about its technology. And to convince really
how hi-tech it is, you open the back of the TV and
show the customer the sophisticated gadgetry it is
filled with.
But the sales man next to you, who is selling the
same model of TV to another customer simply puts on
a TV and lets the customer enjoy the experience to
his hearts content.

Which one of you two is likely to win the

customer more easily ?

A Cash Flow Sheet may be very

tedious and boring, but its visual
impact on the customer is powerful.
There, as the customer actually sees
her money growing month after
month, it transports her into future;
she sees her dream rolling out before
her.

Marketing mutual funds, is

marketing dreams.