How can the liquidity of Mutual funds become a problem for MFDs?
Imagine this:
You have a big-ticket client doing a monthly SIP of 1.5 lakhs. However, they require funds for their child's marriage.
Now, he wants to stop his monthly SIP and redeem investments that he has made over time. Or maybe he needs the money for a medical emergency and is adamant about redeeming his investment.
You are unable to stop this client from stopping this.
How will this impact you?
- Loss of AUM
- Loss of income
- Stagnate growth
In fact, according to a report by Motilal Oswal, Mutual fund redemptions increased 39% year-on-year to Rs 332,300 crore in CY23.
It has led to a decline in net inflows to Rs 206,300 in 2023 from Rs 238,300 in CY22.
Why has this happened?
Liquidity is the culprit. Let me share an interesting fact with you to relate to this.
Did you know that LIC & PPF make more money than mutual funds?
But when we compare the returns
| Investment Product | Average returns per annum |
|---|---|
| Mutual funds | 12-15% |
| LIC | 4-5% |
| PPF | 6-7% |
Mutual funds offer better returns.
So, how is that possible that they make more money? The reason is that Mutual funds are very liquid when compared to other investment products.
The average holding period for LICs and PPFs is more than ten years. While over 50% of mutual funds units of regular plans were redeemed within a year, according to SEBI.
It is evident that the longer you hold investments, the better the compounding. That is why LICs and PPFs make more money than MFs.
But the question remains the same. How to stop premature redemptions?
What could you have done to stop premature redemption?
Scenario 1
When the market falls, clients panic and want to redeem.
To stop your client from redeeming their investment, you should link a purpose to it. The purpose of the investment has a psychological impact. It emotionally attaches the person to their goal.
This ensures that your AUM remains stable even during market turbulence.
However, it may seem like a far-fetched exercise to make goals for every client. Worry not, we have got a solution! Goal GPS with tracker. With this, you can:
- Make quick goals, whether planning for child education, retirement, house planning, etc., with a family photo and a goal photo.
- Map funds, whether existing or new, and assess the shortfall.
- Track goals by sharing proper reports with your clients.
Scenario 2
When clients want funds during an emergency.
At times when there is an emergency, and your client needs money immediately, there is no choice but to redeem their investment.
To solve this, we have got another solution. MFDs can offer loans against mutual funds.
Let us discuss how loans against mutual funds can serve as valuable insurance against client redemption in another blog
For now, As suggested by DP Singh, SBI Mutual fund
Don’t over-sell liquidity in mutual funds, promote longevity of investments. Liquidity is a comfort feature – only to be used in real emergencies. The more you promote liquidity, the more challenges you will face as you keep bringing in new business while redemptions leak out from your AUM. The longevity of investments is the only win-win for your clients and yourself.
Whenever you receive a new lump sum or SIP from your client, make sure to link it with a purpose and ensure longevity of investments. To learn more about how Goal GPS can help you, contact us today!