Mutual fund often carry the line “past performance is not indicative of future returns”. We all know that investing in mutual funds purely on the basis of historical returns is risky. So how does one assess and compare between different schemes?
Fortunately there are standard indicators commonly used in the industry for evaluation. These indicators of risks can be readily applied to analysis of mutual fund schemes as they help us in evaluating the risk-reward parameters easily. Knowing these ratios is essential for any mutual fund advisor/distributor, even though it may not be a foolproof tool of arriving at investment decisions.
In this article, we will talk about these most popular and used indicators. We assume that you will not need to compute the ratios since such info is readily available in most publications /websites.

1. STANDARD DEVIATION (SD)

Definition:

• Statistically, standard deviation measures the dispersion of any data from its mean. In plain English, it means how much returns (read data) is spread apart from the mean or average returns.

Interpretation:

• SD indicates the volatility in returns based on historical data. Thus higher the SD, higher is the volatility in returns and thus higher is the risk.

• You should prefer funds with lower SD.

2. BETA

Definition:

• Beta measures a scheme's volatility compared to that of a benchmark /market. It tells you how much a fund's performance would swing compared to a benchmark.

• Beta, in other words, is a measure of systematic risk or the risk which is attributable to the entire market /benchmark, merely by being present in same.

Interpretation:

• Beta will show how much a scheme's performance is impacted by benchmark /market movement. If a fund has a beta of 1.5, it means that for every 10% upside or downside, the fund's NAV would likely be 15% in the respective direction.

• Whether a high or low beta is good actually depends on the state of the market. If the market is in a bull phase, a scheme with a higher beta will deliver greater returns while in a bearish market, a low beta scheme will be a better choice.

3. ALPHA:

Definition:

• Alpha is a measure of an investment's performance on a risk-adjusted basis. It is the excess return of the scheme relative to the return of the benchmark index.

• In plain English, it basically is the difference between the returns an investor expects from a fund, given its beta, and the return it actually produces.

Interpretation:

• Alpha is often considered to represent the value that a fund manager adds to or subtracts from a fund's return. In other words, Alpha is the return on an investment that is not a result of general movement in the benchmark /market.

• Alpha is reported as a number less than, equal to, or greater than 1.0. A positive Alpha means the scheme has outperformed its benchmark index and vice-versa. The higher a scheme's Alpha, the greater ability to profit from moves in the underlying benchmark.

4. R-SQUARED

Definition:

• R-Squared measures the relationship between a portfolio and its benchmark. It can be thought of as a percentage from 1 to 100.

• It is not a measure of performance and is simply a measure of correlation of a scheme's returns with it's benchmark returns.

Interpretation:

• Beta & R-Squared are related but different measures. R-Squared show shows closely is the scheme returns are correlated or attributable to the benchmark while Beta shows how much will the scheme returns move in reaction to movement in benchmark.

• R-Squared is useful to ascertain the importance of Alpha & Beta. If R-Squared is high, Beta becomes more significant and importance of Alpha reduces as the scheme is closely correlated/similar to the benchmark. If R-Squared is low, it indicates that the fund manager has made the scheme portfolio different than the benchmark and thus Alpha will be more significant and beta less important.

• If one desires a portfolio that is similar to a benchmark then you should choose a high R-Squared scheme and vice-versa. A hypothetical scheme with 0 R-Squared will have no correlation with benchmark while a scheme with 100 R-Squared will almost a replica of the benchmark. Index schemes will have a R-Squared very close to 100.

5. SHARPE RATIO (SR)

Definition:

• The Sharpe ratio is the average return earned in excess of the risk-free rate 'per unit' of volatility or total risk. In other words, it evaluates the return that a fund has generated relative to the risk (as measured by Standard Deviation) taken..

• Developed by William F. Sharpe, SR is today one of the most commonly used ratio for studying mutual funds performance.

Interpretation:

• This ratio helps us to know whether it is a safe to invest in a scheme by taking the risk present. The higher the SR, the better is a scheme's return relative to the amount of risk taken. In other words, the greater the SR, the better its risk-adjusted performance.

• Generally speaking, a scheme with a lower SR and a higher Standard Deviation (SD) should not be preferred. A scheme with higher SR and a lower SD is most preferred as it is giving more returns per unit of risk taken.

• The SR tells investors whether an investment's returns are due to smart investment decisions or the result of excess risk. It is more useful for schemes with lower correlation to the markets or lower R-Squared.

Important note while comparing schemes:

• Comparison between schemes should be made belonging to similar periods and to the same category or peer-set of schemes.

• Comparison should ideally be made in sufficiently long periods to avoid any distortions due to market movements in short term.

• A low R-squared or Beta does not necessarily make an investment a poor choice. It merely means that its performance is statistically unrelated to its benchmark.

Conclusion:

Evaluation of mutual funds go much beyond just scheme ratios and historical returns. There are other important factors to assess like AMC due diligence, fund manager due diligence, investment process & philosophy, investment team, infrastructure and so on. At NJ, we have an in-house research team that does consider all these factor before making any recommendations to its' Partners. While you can rely on such recommendations, it is also important that you be aware of the scheme ratios normally used in the industry. This basic knowledge is essential for any Partner who wishes to project himself as an expert to their investors.

Are you in love proposing a marriage? Are you a candidate wanting to get job? Are you a sales person who wants to sell products? Are you a financial advisor trying to attract clients?

No matter what work you are into or at what stage in life you are in, we all are trying to sell our ideas on a continuous basis. We are in constant exercise to convince everyone else of our point of view. Indeed what we are doing is “selling” or “pitching” at all times. Hoewever, in spite of its' common nature, not many people think about it too much or how to really go about it.

Well, packaging and presentation really matters in this world of competition where clients do not have the adequate time to assess or research any advisor or be loyal to him. No matter how good you are – you must have a strong sales pitch in your armour. In this article, we take a closer look at how we can structure and refine our sales pitch – a critical ingredient of our financial advisory business. The idea is to start practicing this approach and over time, we are sure to have a powerful and effective sales pitch.

The Homework:
An effective sales pitch begins way before you actually meet any client. A proper preparation goes a very long way in shaping your sales pitch. Here is what you should do...

1. Be clear as to what is that you want from the client /prospect?
   At the first meeting, you cannot expect for the client /prospect to hand over a big cheque - do you? The idea is to set increasingly bigger expectations for successive meetings.
2. Figure out what the clients/ prospects want.
   You need to figure out what the client needs or wants and how does your idea fit into their needs/wants. Find out /assess their level of awareness and experience and try and know their financial /family background. Your sales pitch must be directed at meeting their needs and exceeding their expecations.
3. Prepare for the Q&A session.
   Many advisors spend too little time in finding propable questions and framing appropriate answers. Before the meeting date, identify the weak areas of your idea /proposition and frame relevant suggested questions. You can use proper data /facts / cases / humour smartly in Q&A to make yourself stand out.
4. Refine your idea /proposition.
   Your idea /proposition should be clear, simple, easily understantable, concrete, credible, convincing and memorable. It should stand out for the client for some special reason apart from meeting his needs and exceeding his expecations.

The Process:
Now that we have prepared and practiced our sales pitch, it is now time to begin the entire process of delivering the sales pitch. Over time, as we practice this process, we are bound to get more skilled, effective and productive.

1. Set the right time for the meeting: It is preferred that you meet clients when they are likely to be fresh and energetic and open to ideas. If possible, try and set meetings early in the day rather than later.
2. Begin by building rapport: People want to associate with people who they believe will enjoy working with themselves. The idea is to build some form of personal rapport with the client before the actual discussions start and also during the discussions. You may bring up topics like some shared interests, where has the client lived, people /companies he has worked with and so on.
3. Skip the formal presentations: While, it may be helpful in many cases, but it also has some limitations. Powerpoints often restricts /limits your flow of discussion and cliets/prospects may even get bored or distracted watching long presentations. An open discussion also encourages clients/prospects to discuss matters that they want to.
4. Get to the heart soon: We do not want our clients to keep waiting or guessing to know what we are talking about and what we want. Ideally, within the first 10 minutes, we should communicate the most important details and pitch the core of our idea. Then, for the rest of the meeting, you can stick with your idea and keep the client focussed on it.
5. Sound natural & instantaneous: An overpracticed sales pitch is worse than one which is not practiced. Care should be taken that the pitch does not sound too monotonous and rehearsed even if you have delivered it hundreds of times. Every time, it should feel fresh and delivered with great interest and enthusiasm.
6. Give justifications /logics: Simple ideas but without any explanation or justification or logic may not work with the clients. Client expect that you show the proof behind it. Instead of focussing clients of what they should be doing, focuss on making them realise why they should be doing it.
7. Be confidant and handle the Q&A smartly: Try not to be defensive when clients asks questions or raises doubts. Instead, look confident since you have already done your homework! Also never interrupt someone’s question to make a correction and be patient to repeat some answers /explanations already given to the client. Remember that questions are a very good thing as it means that the clients are interested!
8. Make client feel comfortable to say yes: It is important to let the client feel relaxed and not rushed up to make a decision. Let him know that you will care to do the follow-up and send all necessary information and help for him to make a decision.
9. Resolve any concerns: If the clients say no, one has to politely try and resolve their concerns. Your genuine effort to resolve may renew their interest.
10. Make a smooth, dignified exit: If the client is visible not interested, try not to stretch any idea too long. Also do not overstay your welcome and try to look out for the subtle signs that say 'leave'. Do not keep talking when the client not really 'listening'. Even if you fail at the end of all your efforts, be happy to have met the client. Look him into his eyes, thank him the time, say goodbye, smile and give a firm handshake.
    Send a thank you note. As soon as you get back to the office /home, remember to send a thank you note the the client /prospect. If it was a failed meeting, let him know that he is always welcome if ever your help is needed.
11. Follow-up. If the meeting had been sucessful or inconclusive, keep active follow-up of the client after say a week. Include details of what you talked about at the meeting and the decisions made, if any. If you still don’t get a response, follow up one more time. Some experts say you should follow up three times in all, but this may be a bit too much. Typically if the clients do not respond to two follow-ups, they are not interested.

Conclusion:
The sales pitch is important for success as financial advisors. Over time, we may have already developed, knowingly or unknowingly, our own sales pitch. The message is simply to identify, improvise and refine your sales pitch by you becoming more aware, methodological, observant and process driven. With some practice and some effort, our sales pitch will surely become more powerful and effective with time.

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Just imagine, you have a severe stomachache and you go to see a doctor. The doctor instead of discussing your problem, rather talks about the instruments he uses in your diagnosis and the effectiveness of the medicines he gives. You'll be like confused, you want to know the cause of the ache, and how soon will you recover, and what is happening is, you are being pestered with information on medicines and equipments.

Similar is the advisor client story. The client wants to know the solution to their needs, how can they reach their goals, and what advisors in general tell them is the features of the product they are selling.

Consider the following statements:

Statement 1: This is ABC Mutual Fund scheme, it invests in a combination of Stocks and Debt securities. This scheme has historically outperformed its peers and the benchmark. After 5 years, you can redeem this Mutual Fund and actualize your goal of buying a house.

Statement 2: For your goal of buying your house after five years, you should invest in ABC Mutual Fund scheme. Since it's a Balanced Mutual Fund scheme, it will grow at a better pace than your FD as well as the risk will be controlled. Considering your investment horizon and goal amount, it is a good fit for your goal.

You know, which sales pitch would be more engaging for the investor and Why. The latter focuses on the Solution, the former on the Product. In your profession, you must sell products, the difference that the latter creates is, you are not selling a product, but a solution.

You might feel that the end result is the same, the products are actually solutions to the investors' needs, but in our business, ends don't justify the means. The solution the investors are looking for is a link between the need and the product, you need to connect the dots for them.

As advisors, we are tempted to talk about the products and the services that we are offering, but this is not what the investor is looking for. He/she is looking for a solution to his/her need, a way to reach his/her goal. Product selling is Seller centric while Solution selling is Client Centric, there is a thin line between the two, and once you are able to identify the line and adopt a client centric approach, you have got it all.

How do you sell Solutions?

We have penned three key points which can help you understand and implement a solution oriented approach:

1. Listen: You'll be able to provide an appropriate solution only when you understand the problem. Listen carefully to the client's problems and needs, ask questions to get clarity, and then create a connection. Offer a solution which meets the needs, apprise the investor that how your products can help them in achieving their goal and how it is better than the alternate products available in the market.

2. Highlight the value creation: Returns, yes you'll talk about returns, you'll do return comparison, the investing convenience, liquidity, you'll talk about all of that. But all of this is ancillary. The primary focus should be on the value that's being created and how it is contributing to the betterment of the client's life. For Eg. An SIP of Rs 10,000 a month in an XYZ Mutual Fund Scheme will enable the investor have Rs 25 lacs, 10 years later to pay for his daughter's higher education. This is the value you are creating. You cannot skip talking about the product, but it's not the only thing you should be talking.

3. Marketing: One of the most impactful Indian Ads Maggi, it doesn't talk about the noodles, rather it showcases, a kid comes running into the house and says “Mummy bhook lagi” and Mummy says “bas 2 min” and quickly comes up with a bowl of Maggi. Or the Asian Paints Sunil Babu Ad, where the car and the Mrs grow old, but the house is as new as ever. These Ad's only concentrate on the value or the purpose of the product, rather than the product. Customer doesn't buy your claims, till the time you are only focusing on your products, no matter how aggressive marketing you do, won't attract people to your door. The value you bring to the client's life must be communicated through your marketing efforts as well.

Customers, no matter which field it is related to, are looking for customized solutions, and businesses are on their toes offering them the same. Even the mutual fund industry is not behind, they are coming up with targeted mutual fund schemes, like Retirement funds, children's education funds, monthly income funds, etc., to cater to the unique needs of investors. To let your growth know no bounds, a solution oriented approach should run in the blood of your organization. Sell the problem you solve, not the Product.