Would you switch from a high AUM Midcap Fund to a low AUM Midcap Fund?

Does AUM size influence performance of the fund?
This question has haunted me for quite some time now. Few months back I raised this question in facebook group Asan Ideas For Wealth and response I received from experts was majorly negative.There is no empirical evidence so far in Indian Mutual Fund industry that AUM size influences performance of the fund. I stopped worrying about AUM size after that though I was not fully convinced.

The issue of AUM size again came to my mind today during a presentation by Birla Sunlife Fund manager Milind Bafna who manages BSL Pure Value Fund.

While talking about his fund, he said “A year back this fund was 30 crore AUM fund and we had only 18 stocks in the portfolio. So it was easy for us to deliver returns. It quickly became 70 crore fund and then investments started flowing in. We added more stocks to the portfolio and number of stocks went up to 60. Today we have 44 stocks in the portfolio and we are trying to reduce it to 35.”

Listening to this I asked “You said that it was easy to deliver returns when fund size was 30 crore. Do you mean to say that it increasingly becomes difficult to deliver returns as fund size increases?”

He said “Not exactly but once size of the fund increases fund manager’s options start reducing. We have couple of low liquidity stocks in our Pure value fund portfolio but Frontline Equity Fund cannot have these stocks in its portfolio. Say there is a good stock having market cap of 250 crore, I can keep that stock in my portfolio but Frontline Equity will have to buy that company to benefit from the growth of that stock which it cannot do. So we can say that high AUM does influence performance of the fund to some extent.”

I further asked “In case of Midcap funds, fund manager will be forced to include large cap or high liquidity stocks once his AUM size increases beyond a point. So can it be a good idea to switch from a high AUM Midcap fund to a low AUM fund even if the fund has given us good returns?”
“Honestly, Yes!” said Milind Bafna.

So it is a good idea to switch from a high AUM Midcap fund to a low AUM Midcap fund.
Can’t it a be a good idea to do the same with Multicap and Large cap funds also?

Why an average investor will always be “A Lost Investor”

“Please read freefincal.com and you would not require any Insurance agent, Mutual Fund distributor or Financial advisor to advise you about your financial planning”

This is what I tell almost all my clients and even my prospects on my first appointment. I have added my clients to the facebook group ‘Asan Ideas For Wealth’ to make them more aware about personal finance. I want my clients to understand personal finance and importance of goal based investments as it would make things easier for me as an IFA to keep them on track especially with their equity investments with massive volatility involved. But unfortunately barring few of my clients none ever read more than couple of freefincal articles and most of them don’t follow AIFW discussions.

This behavior is not specific to my clients but it is a general behavior among most investors. They get serious about their financial planning when someone like me makes them aware about its necessity but their motivation does not last long and soon they get busy with their life as usual. They do not put little effort that is required to understand basics of personal finance and therefor never arrive at the simplicity of having a term life insurance, health insurance, emergency fund, goal planning and alignment of investments with goals. Many of those who understand are not disciplined and focused enough. A little touch with personal finance blogs and groups like AIFW does help in staying disciplined and focused but most of the investors do not follow these blogs and groups in-spite of having access to them. Thus they continue to be vulnerable to fancy financial products, lure of direct equity and herd mentality around them.

An average lazybones investor will never have clarity, focus and discipline to become a DIY investor. He will always be a “A Lost Investor” at the mercy of his “Financial Advisor”.

My Experiment with Unselling

Technically I am an Insurance agent and a MF distributor. I don’t necessarily need to be a financial planner since I am just a mediator between the company and the customer. I get paid for getting new business and not for suggesting the ‘right financial product’ to the customer. So the only talent I need to acquire is to find ‘customers’ and sell them something which is beneficial for the company and which can earn me a good commission by hook or by crook. (I used Syamantak Pati‘s words here)

To become a successful agent and a distributor, I should learn prospecting and selling tricks, use marketing material, set targets like MDRT and work hard to achieve them.  I should meet as many people as I can and do follow ups till I get business and when I get business, ask these new clients for references to increase my client base.  This is a relationship business, therefore I should build good relationships with all my clients and prospects. I should agree with them on most of the things to create a good image of myself. I should observe successful agents and try to copy them. I should also listen to all my trainers and RMs and should try to follow what they ask me to do. This is a tried and tested method of getting success in insurance and MF selling but I am doing none of this.

Rather I am doing no selling at all. When I call new prospect for an appointment, I tell him “I do not want any business from you right now Sir. All I want is an opportunity to meet you to convey what I do. I will not take more than 5-10 minutes of yours” and I stick to my words. I do not take more than 5-10 minutes in my first appointment unless prospect starts taking interest in what I am saying which most of the time he does. In these first 5-10 minutes, all I do is to open his eyes to the necessity of financial planning.I do not pitch any particular financial product neither do I ask for any business. I ask prospect not to give me any business till he is sure of my competence. I ask him to test me for as long as he wants. I even tell him that I have no problem if he has some close relative or friend who is an insurance agent or a MF distributor and he wants to place business through him. I will still be happy to provide him my advice. I also tell him the option of direct plan and online insurance. I tell him that if he chose to go for direct plan he can give me fees for my advice or else he can place it through me and he doesn’t have to pay fees as I will earn commission from this business. When some prospect tell me that he has his existing advisor, I tell him that I am happy to be his standby advisor who can assist him in case his existing advisor is incapable of providing necessary service. I also tell prospect to call me any-time if  he wants second opinion for any financial product he feel like going for. In the end I ask him to note my number and ensure that he saves my number correctly in-front of me. Then I leave by saying that I would love to assist him in his financial planning if I get an opportunity to do so.

When people see no threat of being sold something and find that no compulsion is being forced on them, they tend to open up. It does not take more than 2-3 minutes for the prospect to lower his defence.  They discuss their existing policies, their  investments, loans and many such things. Few offer to start MF SIP or Health insurance for which I ask them for another appointment where this can be discussed in detail.  Many prospects who begin with an attitude that they know everything and nobody can sell them anything, calm down very soon and start listening to what I have to say.

Few days back I met a doctor in his clinic who said even before I opened my mouth that “Mr. Swapnil, I am not even interested in listening to what you have to say. I have a close friend who takes care of all my finances. But since you insisted on meeting me and said that you will not take more than 5 minutes, I allowed you to come. So you have 5 minutes, go ahead”. I changed my script this time, poured my heart out in 5 minutes and at the end of these 5 minutes he was seriously looking at the SIP meter I had handed him. He discussed many things for next 20 minutes. When I left, I told him that as committed I will not do any follow up calls to get business from him. To which he immediately said “No no, I want you to call any-time you want. We will see what we can do”

I do not do any follow up of the prospects who do not show interest immediately. I do put sms (not marketing msgs but related to personal finance) for few days and call to check whether he has developed any interest. If I do not sense any interest when I call, I leave that prospect alone. Many times I do not even put any sms to prospect if I do not find my wavelength matching with him.

I have decided that I will not manipulate my clients and my prospects, won’t tell them half truths and will not keep them in ignorance for my personal gain. Conventional selling tought in all insurance trainings  involves all these and rationalising it. Many times I do not pick up calls of my RMs because I don’t want my thinking to be corrupted by their selling philosophy and also because I don’t want the guilt of not giving business to them all. I do not have emotional constitution that suits conventional selling. I just cannot pitch anything I am not convinced about myself.

I want my clients who showed confidence in me to be privileged. I want them to receive personal finance advice of the highest quality available in the industry. I don’t want business in quantity. I am content with earning less but I am not ready to compromise on the quality of my advice.  I have no ambition of becoming high earning insurance agent or MF distributor, but I do dream of becoming one of the best advisers in the industry. I spend more time sharpening my knowledge than I spend procuring new business. I sometimes spend whole day preparing for an appointment which is in the evening or next day. I do not ask for references the way agents and distributors are tought to do. I don’t ask for references from my new clients. I only ask clients who are happy with me to give my reference to their friends and relatives who want to invest in MF for it will really be very helpful to me. I don’t do any follow-up calls asking for reference over and over again. I believe that references would follow if I keep working on increasing my knowledge, my value and quality of my advice. Therefore I work harder on myself than I do on my job. I want to provide experience of highest  quality to all my clients.

I started my LIC agency with lot of expectations from my Development officer. In the 3rd month of my LIC agency, DATACOMP trainer Abhijit Nene (The best trainer I ever come across so far in this field and whose training sessions I enjoyed the most. I must have seen some 30 different trainers so far) said in a training in-front of whole class that they will see this guy a TOT in 5 years unless he wastes himself. He said this twice in two different training sessions in-front of all. But my performance has been extremely disappointing so far. Rather I would be ashamed to tell him how much business I have done in last one and half year if I get to meet him again. But surely it has nothing to do with my refusal to do business in conventional way. Its because I have few weaknesses with which you cannot succeed in this business.  I have always been reticent, I seldom speak unless I have  reason. I like being in my own world. Also since childhood I have suffered from complexes which have always held me back from giving my best. I have spend all my life fighting with these complexes and they still haunt me every now and then. I could never enjoy pure confidence all my life because of these complexes. I have been fighting with all these weaknesses of mine and slowly I am getting out of their clutches. I have started liking meeting new people now but I still dislike calling unknown people to secure appointments. I also need to be at my best to do any work.  I  simply don’t call or go on an appointment if I am not feeling at my best and spend time sitting at home reading something. I have met very few people in last one and half year and that’s the prime reason of my mediocre performance so far. But I have no regret for not doing lot of business because had I worked aggressively , I would have ended up selling wrong products. I am lot better placed to do good to the finances of my clients now and I am getting better everyday.

I am OK if I am not praised in agent, distributor and advisor community but I will not compromise my client’s good for any temporary selfish gain. Its tough being unbiased in this profession but definitely not impossible. God will help me in my journey. I have full faith in him.