Equity Insights is a new initiative that has been jointly launched by Franklin Templeton Investments along with Wealth Forum, where we seek to share insights that can enable us to collectively position equity funds better and help investors gain the true long term wealth creation benefits of equity investing.

In the inaugural edition of our advisor perspectives section of this microsite, Deepak Chabbria, one of Southern India's most successful advisors, shares with us how he goes about the task that most falter at: of ensuring that his client portfolios actually capture the benefits of long term wealth creation which we know equity mutual funds deliver. How does Deepak achieve this? Does he rely on an active advisory model or is a financial planning proposition better equipped for this purpose? What are the challenges he faces and how does he overcome them? What kind of clients seem more inclined towards long term wealth creation? Read on as the ace advisor shares his perspectives on all this and more.

WF: Although most advisors ask clients to stay invested through market cycles, many HNI investors expect more than that as advice from their advisors - they expect advisors to add value on an ongoing basis through pro-active fund selection in tune with changing market dynamics. Is that your experience as well with HNI clients? Is there therefore an implicit expectation of alpha delivery by the advisor? What is your equity strategy in such cases?

Deepak: Equity is a unique asset class with attributes which are significantly different from other investment products, like fixed income, gold or real estate. Equity investment is highly liquid, returns are volatile and to add to the problem, we have real time dissemination of information in the form of quotes. Volatility unnerves even the most disciplined equity fan. Though, of late, all asset classes have been volatile, HNI investors sometimes expect to participate and benefit out of every market movement. At my end, before onboarding a new client, I state my investment philosophy; explain to them about what has worked in investing and what has not. I try and back my argument with sufficient data and also showcase few live examples of client portfolios that have stayed put through market cycles. Advisor contribution in generating alpha need not necessarily be in the form of market timing. Proper fund selection, low cost and right products which meet client needs, tax efficient returns and compounding can do the magic.

WF: How do you see the future of active advice - where advisors explicitly take on the mandate of delivering alpha in client portfolios?

Deepak: One needs to understand that when you are investing in products like MFs, you are dealing in a packaged product. You have no control over underlying stocks/bonds. The very fact that you have chosen to go through the MF route is your acceptance of the fund manager's capability to do the right thing and generate superior returns. At best, loss of confidence in the fund manager's ability should prompt advisors in exiting the investment. Frequent churning or profit booking to generate alpha may be counterproductive. Here let me quote Mr Warren Buffet, "The Stock Market Is Designed To Transfer Money From The Active To The Patient."

WF: The mutual fund industry has a great long term track record of wealth creation through equity funds but a fairly poor record of getting these returns into investor portfolios. What has been your experience with delivering product returns into client portfolios?

Deepak: You said it, you couldn't be more succinct. There is a difference between Fund returns and Investor returns. Investors often complain that they do not get the returns that the funds have generated and are being advertised. This is primarily due to their poor investment choices and herd mentality as they often invest at or near the peak and exit after incurring a loss or wait for the break even. Their decisions are often dictated by emotions rather than any reasoning. We have overcome this by focusing on investor goals and ignoring market trends. This way we have been able to take emotion out of investing. Another strategy that has helped us in achieving reasonable returns is staggering the investment via SIPs and commitment to remain invested for the long haul.

WF: What are the biggest challenges you face in trying to get clients to be adequately invested in equity? What are the ways you convince them to do so?

Deepak: The biggest challenge any advisor faces today is how to cut the noise and retain focus on investment strategy and goals. Clients often get swayed by the excessive information that is available, which often is irrelevant or something that is beyond our control. As it is said "Proof of the pudding is in eating", we often resort to showcasing the portfolio performance during and post unfavorable events. Presentation of the right data is very useful in convincing clients to stay invested. Showcasing how, for example, returns rebounded in the months following an event, helps in demonstrating the futility of unnecessary portfolio action in the midst of an event. Recalling the various discussions held with the client that are documented, also helps in effectively conveying the message.

WF: It is said that financial planning is a great way to get clients to stay invested for the long term. How has your experience been on this front? Does a plan bring in the required discipline or is there more that advisors need to do beyond writing a plan, to actually help maintain discipline?

Deepak: FP no doubt is a structured approach and the way forward. Anchoring clients to their goals is indeed an effective way to make them see benefits of long term investing. We have combined this with the data that we have gathered over the years and our experience during various market cycles. We have found it to be a very potent remedy to maintain discipline. Anything that is documented and can be a reference point during times of crisis provides comfort and succor.

WF: From your experience in dealing with clients, is there a particular profile of clients who are more amenable to staying invested for the long haul? Conversely, do you see a pattern in the profiles of clients who prefer to take shorter term views?

Deepak: I have found clients in the age group of 32-35 years and above, married with family responsibilities to be positive and amenable to taking a long term view. This is probably due to a certain maturity that one attains by the time you are in this age bracket and have some visibility in your career and stability of income. I have found clients in younger age groups of 25-30 years to be unsure and indecisive; again this could be because of the situation that they are in.

WF: What is the one thing you would want us to do as an industry to really move the needle on getting investors to genuinely stay invested in equity funds across market cycles?

Deepak: If you analyze fund flows in schemes, you will notice one common thread that runs across. Maximum inflows come at or near peaks and redemptions are at or near bottoms. This has been more or less the trend in the past. Instead we should focus on getting the investors to be regular in investing and make this a habit. Our focus should be on marketing the concept of MFs, rather than marketing the schemes. Highlighting short term performance when it is favorable will obviously attract wrong set of investors; onus is both on advisors as well as AMCs.

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