Understand the type of investor you are before seeking advice

The Indian investor of the 70s and 80s was a satisfied soul. Government clearly defined areas that he could invest in, and get a tax break too — in any case, he did not have funds to spare much beyond that.

Indian markets too were protected, and hence insulated from what happened across the globe. As liberalisation took its roots, “guaranteed” products started going out of vogue, and the disposable income increased, thereby forcing the investor to make a choice for the first time.

But this article is as much about this investor as trying to understand different types of investors, so that the right advisor can be matched to each of them.

Internet-based investor needs a transaction-based advisor:

The investor who likes to research stuff online, does his own analysis and decided where he should invest. He sometimes goes overboard in diversification — investing a total Rs 20,000 in 10 schemes, and hoping that the law of averages goes in his favour.

In all probability, he will go ahead and invest online, forgetting that risk can also be curtailed by staggering the entry dates for the investments. For him, zero entry load in mutual funds works just fine.

If he does invest offline, he wants the help of a distributor who will run around from one AMC to another, and reimburse his transportation costs. He does not realise it, but he will need a similar help at the time of redemption or switch.

The ‘unaware’ investor needs to be educated:

Those of us who have experienced equity mutual funds in the past five years know that the best performing large-cap fund has more than tripled in value against a Sensex growth of 2.3 times.

But what can be done about the uninitiated? Possibly this investor has burnt his fingers with short-term investments in the past, or is just not aware of any products other than the government-guaranteed ones.

The amounts that this investor may start with are small — however the distributor is an essential part of the supply chain, and must be incentivised to make the effort of reaching to this investor.

In the current situation of no-entry load, it will be cumbersome for the distributor to collect and for the investor to pay separately for this investment. Imagine collecting a separate cheque of Rs 50 for an investment of Rs 5,000.

The sophisticated investor wants service:

At the other end of the spectrum we have the sophisticated investor, who comprehends how mutual funds work. He also likes to experiment with newer products in the market. What this investor requires is a fully aware distributor or planner.

Once he establishes trust, this advisor will be the single-point contact for all his financial needs. The advisor can easily charge fees to this investor provided he can retain his trust and keep himself up-to-date with knowledge in his field.

Service levels must be communicated upfront and be adhered to. Of course, there are more varieties of investors than those I have just referred to. Each requires a different approach, varying level of service and hence compensation.

There is enough space in the Indian market place for all these types of advisors and more.