Mutual Funds Investments

The role of a fund manager is to stick to a clear mandate and the role of an advisor is to advice clients on suitability of various products, at different times, for different circumstances, for different investors. In this scenario, can a mutual fund product also offer an element of advice within the product itself? How can you embed advice into a mutual fund? What are embedded advice products? How do they work and how do they benefit investors?

The traditional view in the MF industry - in India and across the world - is that we expect AMCs to produce a diverse range of products across different asset classes - each with a clear, well defined mandate - the narrower / sharper, the better. It then becomes the advisor's job to decide which product to offer to which customer in what circumstances. The role of the product and the role of advice have traditionally been seen as distinct, with little or no overlap.

As the world experiences increasing volatility and as market cycles get shorter and less predictable, questions are being raised worldwide whether retail investors are actually being adequately served well enough. Do small investors, who may not have access to wealth managers, get the benefit of advice about when to buy and when to sell and when to invest in which asset class? Are retail investors getting adequate advice or is advice available only to affluent investors? If retail investors are not getting access to good advice (as it may not be remunerative for an advisor to individually advice small investors), is there merit in embedding advice within the mutual fund product itself?

If advice can be embedded in the product, all you need is a distribution function to reach the product to the investor. After that, the product will continue doing its job, without the need for frequent advisory inputs. What are the kinds of products which have advice embedded in them and how do they work? Lets consider a few popular examples in the Indian context and