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Myth

01

UTIMF ki Paathshala

Mutual Fund Myths & Facts

Take a look at some common Mutual Fund myths.
We're sure this will equip you with the knowledge to advise your clients on how to invest wisely.

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Man

Myth 1

"I am still young. I don't need to start saving so soon."
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Agree

Agree

OR

Disagree

Disagree

Delay means substantial opportunity loss.

How did Mr. Young earn nearly double than Mr. Old by investing the same amount?
Simple: By starting early. Take a look at the following:

Difference between returns earned by Mr. Young and Mr. Old.

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———————————— Client Concern ————————————

“I am still young. I don't need to start saving so soon.”
“Time and tide wait for no man.” - Geoffrey Chaucer (1343-1400), British Poet.

———————————— Illustrating your message ————————————

Opportunity cost of delay in investing is bigger than most of us can imagine.

An individual raising this objection may typically be a well-earning young professional. He/she is career oriented and aggressive but has 'lifestyle goals' and not 'investing' goals. Try to impress upon him/her, the size of impact caused by not investing from an early age. Try to show that he can start investing even with smaller amounts, that will not alter his lifestyle. Try to make the individual fall into a habit of investing.

Keywords: habit of investing, impact of delay, power of compounding, lifestyle, wealth creation.

———————————— Talking Points ————————————

In the example, Young started investing at the age of 26 years. He invested `12,000 every year till the age of 50 years (grand total invested: `3,00,000). Old did not form a habit of investing till he was 36 years of age. He invested `12,000 per year till the age of 60 years (grand total invested: `3,00,000).

When both turned 60, Young's investment had grown to `33,67,148 and Old's investment had grown to `12,98,181 - Young now had nearly double of what Old had! nearly `10,00,000 more!

Depending upon your clients financial status, amount of investment can be increase, to amplify the impact on the clients mind i.e. if the investment was `1,20,000 pa, Young would have earned `1 crore more.

Your client can create this habit of investing such amounts, without even having to alter his/her lifestyle i.e. dining out, movies, travel, clothing, etc.

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DON'T DELAY!

Start investing in your future today!

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Man

Myth 2

In the long run, we are all dead. "I want short term returns."
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Agree

Agree

OR

Disagree

Disagree

Longer horizon moderates the risk of volatility.

Investment goals tied to the short-term, face great unpredictability. The longer your investment horizon, the smoother is the trend of returns, meaning that your probability of achieving an appropriate goal increases.

Increasing time horizon, reduces instances of negative returns.

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Source: Verity Analytics

Note: One-year return is absolute while others are CAGR Returns, shown in percentage.

———————————— Client Concern ————————————

“In the long run we are all dead. I want short-term returns”

“One can always trust time. Insert a wedge of time and nearly everything straightens itself out.” Author: Norman Douglas 1868-1952, British Author.

———————————— Illustrating your message ————————————

Probability of achieving short-term investment goals faces higher unpredictability.

As client is setting short-term investment goals for himself, explain using the graphs that shorter-term returns are more unpredictable in comparison to longer time frame. Due to this, the chances that client may NOT be able to meet his/her increas e in investment goals. On the other hand, the longer the time frame of investment, the lesser the chance of ever facing negative return. Longer term increases probability or predictability of achieving appropriate investment goals.

Keywords: Predictability, probability, investment goals, negative returns, volatility.

———————————— Talking Points ————————————

One-year return is highly unpredictable & on several occasions, the return can be negative. As we move forward with the time frame, the occurrences of negative returns reduce i.e. negative returns of 5-year investment is less than 1-year and 3 -year.
Occurrences of negative returns for 10-year and 15-year horizon are reduced even further.

Investing long-term will improve predictability of achieving investment goals. Long-term returns are rarely negative.

The best time to sell is only when you have achieved your financial goals.

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Man

Myth 3

"I can't give my hard-earned money to Fund Managers...I can manage my own portfolio."
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Agree

Agree

OR

Disagree

Disagree

Direct investment in equities is too risky...

Mutual funds allow you to benefit from diversification and reduce risk of individual stocks, by spreading the investments among various companies belonging to different industries.

Equity Mutual Funds benefit from diversification

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Source: Verity Analytics

Compounded annualized returns from 28 September 2001 to 30 2011 of 10 largest open-ended diversified Equity Funds in existence for over 10 years. Past performance of the Sponsors / Mutual Fund / Scheme(s) / Asset Management Company is not necessarily indicative, of future results and may not necessarily provide a basis for comparison with other investments. September.

———————————— Client Concern ————————————

“I can't give my hard-earned money to Fund Managers... I can manage my own portfolio.”

“Our knowledge is the amassed thought and experience of innumerable minds.” Ralph Waldo Emerson 1803-1882, American Poet, Essayist.

———————————— Illustrating your message ————————————

Diversifying through Mutual Funds may be the most fundamentally effective strategy for staying afloat during market downturns.

Professional Management.

The client is probably excited with the equity market returns and therefore, feels that investing directly is better.

Use the graph to illustrate the risk involved in investing in individual stocks. Emphasize on the lesser risk involved in diversification by pointing out the relative volatility. Also, stress on the importance of professional investment management by experienced Fund Managers.

Mutual Funds investors benefit from diversification without investing large sums of money that would be required to create an individual portfolio.

Mutual Funds offer diversification across sectors and across market cap.

———————————— Talking Points ————————————

The primary advantage of investing in Mutual Funds is the professional management of your money.

By investing in Mutual Fund instead of owning individual stocks or bonds, your risk is spread out.

By investing in a large basket of companies through Mutual Funds, loss in any particular company is offset by gains in others.

Because a Mutual Fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay.

A few individual scripts may give you higher returns but taming volatility is not possible. Matching the diversification and expertise of mutual funds is difficult.

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Man

Myth 4

Mutual Funds do not protect from inflation.
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It does

It does

OR

It does not

It does not

Equity schemes beat inflation in the long run.

Equity Fund investments bring sizeable returns over the long-term, being driven by macro-economic factors. Equity scheme returns outshine fixed income investments like fixed deposits, Post Office Schemes, etc. and also stay ahead of inflation rate in the long run.

Equity Funds Composite - NAV Growth

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Source: The Association of Mutual Funds in India, Verity Analytics

Note: Largest Open Ended Diversified Equity Funds in existence for over 10 years are considered for Equity Funds composite

———————————— Client Concern ————————————

Mutual Fund does not protect from inflation.

“Beating inflation is like swimming against the current, if you are not fast enough you may be going backwards.”

———————————— Illustrating your message ————————————

Equity Mutual Fund investment are better off than most others to beat inflation.

Ask client what his expectations about inflation are for the future. Also ask about his expectations from the equity market. Help him by informing him about the recent growth rates of Indian economy and rough estimates for the coming years.

Use the above figures to arrive at real rate of return. Also calculate real rate of return of schemes with fixed rate of return like Fixed Deposits, NSC, PPF, etc.

Do consider the tax bracket of the client, while explaining the above as interest income from FD, NSC and PPF may be taxed.

Keywords: Potential of equity market returns, economic growth.

———————————— Talking Points ————————————

The trick to beating inflation is simple: the growth rate of your income must be higher or at least keep pace with inflation rate.

Inflation is variable and therefore, fixed return investments may not be helpful to beat inflation during high inflation period. The taxation factor also cuts down return. Long-term Equity Fund investments can however, maintain a rate higher than inflation. Typically, in a growing or developing economy like India, rate of inflation will be on the higher side but Equity Fund growth rate would be stronger, because of strong economic growth rate.

The potential of equity fund investments in a fast growing economy can far outpace the inflation rate.

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Man

Myth 5

Equity funds give great returns. "Why shouldn't I put all my money in equity schemes?"
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Agree

True

OR

Disagree

False

Always weigh investment decisions against risk.

Equity Funds will offer higher returns but along with higher risk. It can cause greater pain in times of downturn. Merely, diversifying within an asset class may not help; to smoothen out risk, utilise different classes like debt, equity and bonds.

Propensity of equity funds to crash deeper in sell-offs.

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Source: Verity Analytics

Note: Balance schemes typically have allocation in 60:40 proportions between equity and debt.

———————————— Client Concern ————————————

“Equity Funds give great returns. Why shouldn't I put all my money in Equity Schemes?”

“Take calculated risks. This is quite different from being rash.” George S. Patton 1885-1945, American Army General, World War II.

———————————— Illustrating your message ————————————

Diversify across asset classes

Use the graphs to show to warn the client about short-term risks, involved in having entire money parked in Equity Funds. If for some reason, he has to sell during a time of selling pressure in the market, the Equity Fund could have depreciated faster than a balanced fund.

A balanced fund has some portion invested in debt/money market instruments that brings down volatility of the NAV. The equity portion however, aims for growth of capital.

Keywords: risk, trading loss, asset class, bonds/debt, volatility.

———————————— Talking Points ————————————

Diversification does not only mean having different Equity Schemes in your portfolio. Diversification also means that assets should be allocated across different asset classes viz. equity and debt. This smooths volatility and can assist better in achieving financial goals.

Equity Fund NAV can drop fast in a short-term scenario, which can make it difficult for you to attain your investment goals. Balanced fund typically spread out assets between equity:debt in 60:40 ratio.

The returns offered balanced funds are relatively lower than equity schemes but not poor. In several cases, the relative safety given by a balanced scheme could offset the higher return given by an Equity Scheme.

Merely being exposed to high-risk equity funds may hurt your trading ideas. A partial exposure to debt smoothens out the risk & volatility.

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Man

Myth 6

"Market is so volatile. I should sell."
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Agree

Agree

OR

Disagree

Disagree

Volatility can be a false alarm; hang on!

Volatile periods are depressing times, but do not sell. It pays to stay invested in a growing economy.

Periods of stock market volatility on the long-term graph.

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Source: BSE, GOI & Verity Analytics
Past performance may or may not be sustained in future.

———————————— Client Concern ————————————

“Market is so volatile, I should sell.”

“Patience is the best remedy for every trouble.” Titus Maccius Plautus (254 BC - 184 BC) Author, Rudens

———————————— Illustrating your message ————————————

Should you react to volatility by selling off?

A client raising this concern is likely to be an individual, who is not familiar with the ways of the stock market from a historical perspective. He may not be an experienced investor and is therefore, contemplating selling off investments in volatile periods.

He has set certain pain barriers for himself, in terms of volatility e.g. if Sensex volatility crosses 50% for a month, he will sell-off investments.

Agree with client that volatile period test the most experienced of investors. It is hard to sustain but patience finally pays.

Try to soothe client concern by diverting his focus from pessimistic views/opinions that he may have read/heard in media/friend circle. Instead, bring his focus to India's economic fundamentals.

Keywords: growing economy, macro-economic fundamentals, GDP, patience.

———————————— Talking Points ————————————

Use graph to show periods, when stock market volatility was at its highest. The shaded areas are the periods of extreme volatility. Ask client to assume that he sold-off his investments during one of these periods. Then ask him to compare the level of NAV during that period and on the latest date - this will show in most cases, that if he had stayed invested, eventually his investment value would have been bigger today.

Ask client to then look at the GDP graph.
Explain to him that India is the second fastest growing economy in the world. It is expected to grow at a rapid pace, which means that business will continue to grow and profits will rise. Staying invested in well-diversified and well-managed funds will be beneficial in the longer run.

Volatility is in the nature of the market but eventually, the fundamental factors will influence markets and reward you.

India is the second fastest growing economy in the world. Fundamentals are positive for the long-term.

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Man

Myth 7

Mutual Funds are too risky. They do not assure returns.
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Agree

Agree

OR

Disagree

Disagree

No one can guarantee returns.

No fund can guarantee returns, when it comes to equity. But you can choose the amount of risk to be taken. Mutual Funds offer an array of options, across the risk-potential returns matrix. Investors can select schemes as per their own risk appetite.

Risk Returns Analysis

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Source: Verity Analytics

Equity-oriented Funds cannot assure returns, because portfolios contain investments in the stock market. The nature of the stock market is comparatively riskier but over a long-term, returns are higher. 5 years rolling returns for Equity and Debt Funds composite are calculated considering schemes, in existence of over 10 years.

———————————— Client Concern ————————————

Mutual Fund's are too risky. They do not assure returns

“In this world nothing can be said to be certain, except death and taxes.”Author: Benjamin Franklin 1706-1790, American Scientist, Diplomat.

———————————— Illustrating your message ————————————

MFs cannot assure returns but higher risk will bring higher return beyond the short-term.

Client raising this objection could be unreasonably scared, of risk and or inadequately informed about the offerings of MFs.

Explain through the matrix how MFs offer varied options from the risk perspective. Therefore, investor with every degree of risk appetite can select schemes as per personal requirements/goals.

Assured returns may not be a rational promise on the part of funds. This is because certain schemes invest into the equity markets, which are driven by variety of variables like economic growth, interest rates, rules and regulations, natural disasters, etc.

However, beyond the short-term, equity-oriented investments will give higher returns.

Keywords: long-term, risk-return matrix.

———————————— Talking Points ————————————

The nature of stock market is unpredictable, but in the long-term, uncertainties are ironed out and stock markets provide higher return. Avenues like PPF, NSE, Fixed Deposits provide safety and assured return but in the same period, MF investments outperform their returns by a vast margin.

History reveals that equity-oriented funds outperform assured-return investments. Risk is high but with longer term, mutual fund returns are also higher.

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Man

Myth 8

"Scheme with a lower NAV is more attractive because I can get more units."
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Agree

Agree

OR

Disagree

Disagree

Focus not on NAV but on composition of the portfolio.

While choosing a fund for investment, do not focus on the NAV figure. It matters little. What matters, is the quality of the portfolio i.e. scheme objective, asset allocation, Fund Manager/Fund House record etc. and your financial needs/goals.

High or low NAV will not affect the redemption value; what matters is the rate of growth.

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Source: Verity Analytics

Note: Entry/Exit Loads and taxes are ignored for comparison purpose.

———————————— Client Concern ————————————

“Scheme with lower NAV is more attractive because I can get more units.”

———————————— Illustrating your message ————————————

A NAV is just a figure

This is a question that many individuals raise, while deciding on fresh investments in funds. You need to erase the perception of the client, that a scheme X with lower NAV figure will be better than a scheme Y with higher NAV because X will buy him higher number of units.

Bring to the notice of the client that the difference could only, be because of the inception date: a newer scheme is likely to have lower NAV than an older scheme.

An older scheme reflects the record of the Fund House/Manager. Future returns also depend upon the composition of the portfolio and aspects like asset allocation, scheme objective and market developments. Make client understand that absolute return will be the same considering x% appreciation in scheme with higher or lower NAV.

The NAV figure will only decide the number of units the investor will receive, for the amount invested.

Keywords: scheme objective/theme, investment goals, portfolio composition, economic outlook.

———————————— Talking Points ————————————

Between two schemes, a scheme with latest inception date may have lower NAV but future returns do not depend on this factor. NAV figure merely decided how many units the investor will get for the amount that he/she has invested.

You can buy more units in a scheme with lower NAV. However, it is the portfolio composition and your financial goals that you should concentrate on.

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Man

Myth 9

"In falling markets, I should stop SIP."
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Agree

Agree

OR

Disagree

Disagree

Falling markets are best for accumulation strategy.

Falling markets are testing times for the most seasoned investors. But, think about it in this manner - "I can accumulate more Mutual Fund units when NAV falls" - and a weakening market could well turn-out to be a blessing in disguise.

Benefit from rupee cost averaging - NAV Growth

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Source: Verity Analytics

Note: Graph 1 illustrates number of units purchased by investing `1000 per month on the 1st of every month in UTI Master Value Fund, since 1st September 2005. Price does not include entry load.
Graph 2 illustrates growth in investment amount. Past performance may or may not be sustained in future.

———————————— Client Concern ————————————

“In falling markets I should stop SIP.”

“They that sow in tears shall reap joy [Psalms 126:5].”
Author: Bible Sacred Scriptures.

———————————— Illustrating your message ————————————

Falling markets are good for accumulating SIP units.

When the client is showing a propensity to stop the habit of systematic investment plan (SIP) during periods of market stress, try to talk the client out of acting in panic.

Utilise graphs to illustrate the simple arithmetic of receiving more number of SIP units when NAV drops. Explain the benefit of rupee cost averaging.

Use long-term stock market graphs and India's macro-economic story to explain how NAV will rise in the long run. Thus, it makes sense to continue SIP and accumulate as many units as possible.

Keywords: accumulation, number of units, lower NAV, long-term prospects, rupee cost averaging.

———————————— Talking Points ————————————

Arithmetic of lower NAV and higher number of SIP units. The nature of stock market is unpredictable but in the long-term, uncertainties are ironed out and stock markets provide higher return. Equity Fund investments outperform returns, of most other investments by a vast margin in the long run. Long-term economic prospect of India.

Lower NAV means a good time to accumulate SIP units. Don't stop SIP even if markets are falling.

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Man

Myth 10

Metals was the best sector in 2004. "I will invest in metals this year."
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Agree

Agree

OR

Disagree

Disagree

Diversify investments across sectors

Growth-driven sectors will give strong returns, in a growing economy like India. But, due to structural and global imbalances, volatility is always around the corner. Beware of being driven by recent gains of individual sectors. Diversification across a few sectors, is a better strategy to mitigate sector-specific risk and smoothen your returns' curve.

Performance of certain sectors and a diversified funds composite over 10 years.

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Source: Verity Analytics

Note: Composite index of diversified Equity Funds have performed better in five years out of ten.

———————————— Client Concern ————————————

Metals was the best sector in 2004. "I will invest in metals this year."

———————————— Illustrating your message ————————————

Diversifying across a few sectors helps to mitigate risks, even in a growing economy.

Client is being driven by the momentum gained by a certain sector in the last few months/year.

Although, growth-driven sectors like metals, capital goods, durables, etc. will certainly perform well in a growing economy like India, client needs to be advised about the risks faced by markets in a structurally imbalanced or developing country like India.

Use the graph to show, how some sector performed poorly, after one bonanza year or returns. Similarly, point out the performance of the composite index of diversified funds which was in the top 2 (among the group considered) sectors 5 times out of the last 10 years.

Point out that interestingly, the composite diversified especially performed better than others in the years of weak or negative market returns. Although, chasing growth-driven sectors is a good ploy as India has strong fundamentals, it makes lot of sense to spread investments across sectors. This will mitigate risk. Keywords: diversification, structural imbalance, developing country, all eggs in one basket.

———————————— Talking Points ————————————

A bonanza year for a sector can often be followed by a poor year (see graph). Diversification helps to mitigate sector-specific risk that can emerge due to structural changes possible in a developing nation like India. Instead of putting all the eggs in the basket of one sector, diversification across a few growth-driven sectors can be a better ploy to smoothen the curve of returns. This can allow investors to draw optimum benefit out of a fast growing economy like India. High-potential diversified portfolios can be constructed by dividing assets among a group of Sector Funds.

Diversify investments across a few growth sectors to mitigate risk and gain optimum benefit out of a growing economy.

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Man

Myth 11

Fixed income investments are safe investments.
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Agree

Agree

OR

Disagree

Disagree

Equity funds give vastly superior returns than fixed income.

It is a well-known notion, that fixed income or debt investments are safe. It is also a well-known fact, that equity investments outperform debt returns by a big margin in the long run. Debt investments will give limited fixed returns, while equities allow you to build wealth. So, isn't it safe enough to invest in equity funds in the long run and build wealth?

Trend of returns of debt and equity composite.

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Source: Verity Analytics

Note: 7 years rolling returns for Equity and Debt Funds composite are calculated considering schemes in existence of over 10 years.

———————————— Client Concern ————————————

Fixed income investments are safe investments.

“Outside show is a poor substitute for inner worth.” Author: Aesop 620-560 BC, Greek Fabulist.

———————————— Illustrating your message ————————————

What use is the safety when equities can give extraordinary capital gains over the long-term?

The client is coining a well know phrase/fact because fixed income or debt investments always protect, the principle (barring case of default). However, a look at the graph clearly shows that returns of Equity Funds are vastly higher than so called safe debt investment.

Show the graph to client and ask, if the safety of debt would be an appropriate price to pay? Or would he like to build wealth by investing for the long-term in Equity Funds?

Keywords: capital gains, growth prospects, long-term.

———————————— Talking Points ————————————

Debt investments protect principle and provide regular but 'fixed income' via regular interest. Long-term equity investments provide the potential of capital gains. In a growing economy like India, potential of capital gains is abundant across industries or sectors. Equity Fund investments give the chance to build wealth over the long-term.

For the long-term, safety of debt investments is a big opportunity lost, compared with the potential of capital gains from equity funds.

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Man

Myth 12

"Markets are lousy, I want to get out."
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Agree

Agree

OR

Disagree

Disagree

Investing is not always about exciting market scenarios but about discipline.

Investors should learn to take advantage of unappealing scenarios.

Let's consider two perspectives.

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Source: BSE, UTI MF, Verity Analytics

Note: Scenario 1. Illustrates performance of Sensex since 1 September 1991 to 30 September 2011.
Scenario 2. Illustrates number of units purchased by investing `1000 per month on the 1st of every month in UTI Master Value Fund since 01 September 2005. Price does not include entry load.

———————————— Client Concern ————————————

“Markets are lousy, I want to get out.”

———————————— Illustrating your message ————————————

Given the economy's growth and other fundamentals, markets are bound to perform well in the long run.

By lousy, the client could mean weak or sideways. Given in the above graph are two scenarios, one of flat and then ascending market, second includes a period of weakness/ volatility. The client may be concerned that the market is not appealing enough and may want to sell off investments or may be hesitant to continue investing.

Educate and convince the client that, given the economy's growth and other fundamentals, markets are bound to perform well in the long run. Show him the bigger picture. Use the graphs to convince the client about the dynamics of the market. Emphasise on the importance of staying invested for long-term to generate maximum returns. Emphasise that with short-term investment the client may be gambling with his hard earned money.

Also discuss the benefits of investment, at regular time periods, using Systematic Investment Plans (SIP).

———————————— Talking Points ————————————

Show him the graph and explain that even if he had invested in any of the market peaks, he would still see capital appreciation and positive returns, in the long run. Economic growth and strong fundamentals outweigh the short-term fluctuations. You can use recent economic growth to illustrate the same. Always have a long-term view, while investing. Adopt periodic investment style like SIPs to eliminate volatility.

Investing is not always about exciting market scenarios but about discipline and achieving certain life/family goals.

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Man

Myth 13

"I can't handle the pressure of short-term volatility of markets. I might lose my money."
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Agree

Agree

OR

Disagree

Disagree

Investing small amounts at regular intervals proves to be very effective.

For people who cannot handle short-term volatility in markets, Systematic Investment Plan (SIP) is just what the experts recommend.

Lumpsum investment v/s Systematic Investment Plan.

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Source: BSE, Verity Analytics

The example is purely hypothetical and illustrates the returns of the BSE Sensex. In real life, one cannot invest directly in the BSE Sensex. It is also not an indicator of performance of any schemes of UTI MF. Annualised and compounded returns of the BSE Sensex based on 30 September 2011. In the above example, it is considered that a lumpsum amount of `40,000 has been invested at closing value of BSE Sensex as on 02 June 2008. SIP amount assumed of `1000 to be invested on the 1st day of every month in the closing value of BSE Sensex for 40 months.

———————————— Client Concern ————————————

“I can't handle the pressure of short-term volatility of markets.

I might lose my money.”

———————————— Illustrating your message ————————————

You won't have to lose money in markets, if you take calculated risks. SIP is one way.

The client may be too scared of losing his money, but, at the same time he does not want to lose-out on the opportunity of the returns, that can be generated from investment in equities. Inform him, that if he wants to invest safely in Equity Schemes without losing his money, he can invest small amounts over a period, to average-out the volatility. SIP is the best option for him. Use the graph to illustrate to the customer, the benefits of SIPs vis-à-vis lumpsum investment. Emphasise upon the advantages of SIPs i.e. rupee-cost averaging, compounding and discipline in investment.

———————————— Talking Points ————————————

Explain to the client that, there are ways to eliminate risks involved in the markets and minimise the possibility of losses, incurred due to short-term market volatility. One of the ways is to invest via Systematic Investment Plans (SIP). The investor gets a two way benefit, while investing in SIPs. If the NAV of the scheme appreciates then the investor will gains through capital appreciation. If the NAV of the scheme falls due to volatility in the markets, even then the investor gains as he can now buy more units of the scheme, with the same amount of money. This feature is called rupee-cost averaging. The investor also gets the benefit of compounding, as the dividends from the scheme are reinvested into the market.

Investing does not have to be always lumpsum. Investing small amounts at regular intervals proves to be very effective.

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Man

Myth 14

"I want international exposure for my investments."
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Very much

Very much

OR

Not at all

Not at all

When the whole world is investing in India, why do you want to go out?

When the whole world is investing in India, why do you want to go out? Investors are flocking to put their money into emerging nations, especially India.

Comparison of the GDP growth of India vis-a-vis developed economies.

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Source: World Bank, SEBI
The above graph represents the annual growth rate of the GDP of USA, UK, Germany, Japan and India from FY2001-2002 to FY2009-2010 at market prices based on constant local currency. The graph inside represents the FII inflows into Indian stock markets from 2001 to 2010.

———————————— Client Concern ————————————

“I want international exposure for my investments.”

———————————— Illustrating your message ————————————

Investing overseas has its own risks that the investor should be aware of.

The client probably thinks the grass is greener on the other side and needs to be informed, that it is not. He might not be aware of the situation of economies around the world. Using the graph, illustrate to him that the Indian economy is doing much better than most of the developed economies and the growth potential here is far better than most of the foreign economies. You can also mention the trouble in the Euro-zone to further fortify your arguments. Educate the client, that since Indian economy is in the beginning of the growth phase the market may provide handsome growth in the long-term. Investment in foreign markets also consists of various other risks, such as interest rate risk, exchange rate risk, geopolitical risk. The rate of return is invariably far lower in developed economies.

———————————— Talking Points ————————————

Comparison of the Indian economy with other economies. Developed nations have slow economic growth compared to emerging economies. High growth potential in the long-term. Mutual Funds are a preferable way for investment in emerging economies because of their diversification features.

Investing in a growing economy is always better than investing in an already-grown economy. So, there is no reason to invest outside india as the returns are quite compelling here.

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Myth 15

"I want to focus on a few stocks to build wealth."
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Disagree

To build wealth without losing your money…diversification is the way to go.

Very few people who have concentrated their wealth have succeeded, the key is to diversify in order to minimise risk.

A Case Study

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Source: NSE

Note: The above graphs represent the daily closing prices of the corresponding scrips

———————————— Client Concern ————————————

“I want to focus on few stocks to build wealth.”

“Beating inflation is like swimming against the current, if you are not fast enough you may be going backwards.”

———————————— Illustrating your message ————————————

Concentration of funds in a few stocks can prove to be disastrous.

The client may have seen some scrips generating exponential returns and hence, may be of the view that investing all his funds in such scrips instead of diversifying will bring him great wealth. Use the graphs to explain to him the result of this strategy, if the scrip fails. Many people have gone bankrupt following this strategy. This kind of concentration can only be done if the investor has extra funds and the loss of which does not affect him in any way, which is never the case. Concentration of funds can be disastrous whereas diversification brings in the much needed stability, as the negative impact of one scrip does not have a broad consequence on the overall portfolio.

———————————— Talking Points ————————————

Consequences of concentration of funds vis-à-vis diversification. It is virtually impossible to time the market perfectly and consistently. Deep trouble if the strategy fails. Diversification brings stability to the portfolio. Keeps the funds safe. Mutual Funds are a preferable way to diversify.

To build wealth without losing your money... diversification is the way to go.

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