Wednesday, March 17, 2010
Factors Influencing Purchase Choices Among Urban Youth
An article in The Economic Times (http://bit.ly/bWICOw), once featured an interesting article on the purchase choices made by the youth around us. Through this blog I have made an attempt to look at the factors from the perspective of Financial Services Sector and especially from the perspective of 'financial literacy' as an idea that my organisation and other conscientous organizations in the BFSI sector want (request) the youth in the 18-22 years bracket to embrace.
Hereon, instead of calling 'financial literacy' an idea, I shall refer to it as a social product.
The seeding of financial literacy needs to happen at an even younger age, but its never late to start. This kind of an education drive has never taken centre-stage, and today Apex bodies such as SEBI (Securities & Exchange Board of India) alongwith other market participants are drafting concrete plans and implementing the same to ensure that we are able to build a rich and vibrant economy, of which today's youth is a non-negotiable part. This is especially important also because the Government has gone on a political-party-independent drive to add 500m skilled job in the country by 2022 (www.nsdcindia.org), and also on a drive to improve the governance system in the smallest administrative cell in India, 'the panchayat'. For both of these drives, the Government has chosen the PPP (Public Private Partnership) route to ensure scalability, economies of scale, process efficiency and measureable productivity.
With these two in place, it doesn not take a rocket-scientist to expect a lot of money getting generated and getting consumed. Keeping all of this in mind if the concept of 'financial literacy' is not seeded well, then we would have a situation where money is possibly being saved, and but not getting invested at the right avenues, hence building the foundation of a catastrophe in the long-term. Considering an imminent of urbanisation of population (doesn't mean that all of the population needs to move to metros, but what matters is the thought process).
Well, to conduct this study a unique network of 'student transmitters' across campuses was used; these act as insight seekers & conversation seeders. The network reached 6 metro cities and connects with over 10000 students. The sample size makes the study worth reckoning.
The study talks of 7 factors that influence purchase choices among urban youth...
1. Talk Value
2. Utility
3. Substance
4. Conversations
5. Social Relevance
6. Engagement
7. Present at Point of Need
TALK VALUE
The product does not need to be the centre of attention but should be able to place the young buyer in a position of exclusive attention during conversations. For instance, a growing number of iPhone users are beginning to purchase unique applications, despite the availabilty of many free ones.
My take basis my observations & interactions with the youth has been that if we are able to place our social product amongst the youth in form of a 'knowledge piece' that arouses contextual interest, and one that can be put into use, it will drive the youth to understand more of it. And once the benefits are seen, people would like to flaunt the knowledge building interest amongst others. The same thing happened in its own way for IT, and the Urban India saw a sudden increase in the use of computers amongst the youth in 1995-1997.
UTILITY
Budgetary constraints mean that the products and features must have longterm utility, particularly when it comes to high-end purchases.
My take on this is that 'high-end' has a flexible definition whic is directly proportional to my ability to take risks with my disposable income. So, a 'high-end' purchase for me will not / may not be so for someone earning more than me, like my boss. So, if its all about the risks that we can take with our disposable income, we need to ensure that we have a low-entry barrier for the products that the youth can chose from once they become literate. The next thing comes in is long-term utility which is all about products designed to meet specific future needs; need-based maturity and not purely value-based maturity kind of products.
SUBSTANCE
Yes, enticing packaging is no longer enough. Youngsters today have evolved and place a higher currency on the content. It might not glitter, but it better be gold!
The way I look at it, products need to be simple. Infact, a senior colleague was mentioning yesterday that we need to innovate to keep things simple, and that the masses aren't quite ready for exotic financial products; what was meant that financial products have to match the maturity of the buyers en-masse; and its not about whose-products-are-more-exotic.
CONVERSATIONS
At the point of sale, the youth make a choice easily if prior conversations about the brand have taken place within their friends/peer group. These discussions serve as easy references. For instance, laptop purchase decisions are also influenced by conversations in peer groups.
My point is that organisations should now look at making communications to their target segment interesting (and one doesn't have to einstein to know that), but the needs of the youth in terms of communication are pretty different, and the conventional wisdom around it will not work. So, are we using new media types such as facebook & twitter to update information, or are we looking at ways of engaging the youth.
SOCIAL RELEVANCE
A small but significant trend which is emerging. Students prefer buying products that have a positive impact on society. For instance, young people have started influencing their parents to only purchase ecofriendly home electronics, even though they maybe more expensive.
This is great, because if this is a component of purchase decisions, then we need to focus on various activities that not only deliver social value, but also projects them properly. Basically, what I understand is that making money is not bad, but everyone wants to see as to how much as we seeding back into the masses. So, this is not about socialism in its archaic context, but about how 'social' and 'capitalist' work hand-in-hand in the society... neo-capitalism.
ENGAGEMENT
Given the high level of clutter, young people's choices tend to tilt towards brands that engage them in a sustained manner. The target group also responds more positively on activations. For instance, games/events in college festivals where the product is strategically embedded in their environment stand a better chance of achieving higher brand recall.
So, its not just about one-on-one conversations, but also about whether there is someone talking about us, when we aren't there; are we able to engage our customers, and its beyond the online media.
PRESENCE AT POINT OF NEED
The target group feels more connected and evinces loyalty to brands that are available when they need it. So the propensity to choose the same brand the next time is higher. For example, a new sanitary pad brand was available in dispensaries inside colleges, which created a brand connect with the female target group.
The question is how accessible are we, and that's not an easy one to work around. But, why forget the way telecom companies simplified their product and made it available with every mom-n-pop store, junk store etc. Innovate to remain simple.
Saturday, March 6, 2010
Learning from Indian Bosses
Time to rethink what we read and who me follow!
Wharton professor of management Peter Cappelli on leadership lessons from India: http://bit.ly/atsfWd http://bit.ly/d97kvg
Peter Capelli presents an interesting perspective... The interesting thing is that many of these practices we do witness happening around us all the time, but, are biases around 'what is best has to be from west' stops us from looking at these; and while I say that, it is not entirely true too, for I have known of a lot of people (read, quite a lot) including me who have been studying these behaviors of indian bosses closely. There are ills as well, which is OK, considering that they are a part of everything & anything; the 'matter which matters' is to look at the replicable behaviors and move forward! So, net net, it makes me feel proud, and it ain't so bad as it looks!
Follow both the links, and read the entire article presented in two forms... He says...
The idea that what is good for business is good for America -- a common phrase in an earlier generation -- seems a distant memory. Where do we look for business leadership?
Let's outsource it!
In an interesting sign of the times, the most impressive business leaders at the moment may be in India. What makes them impressive is a commitment to social goals that extend beyond the interests of their firms and -- here's the good part -- stunningly impressive performance.
They don't appear to be paying any price in terms of performance for being good citizens.
The Indian economy...
> largely sidestepped the financial crisis because of wise banking practices,
> her overall growth rate is second in the world,
> her major corporations are growing at rates of 20 percent to 40 percent per year,
> her companies have been on an acquisition binge, and the evidence suggests that when they acquire foreign companies, those companies perform better.
A study of Indian businesses based around interviews with the leaders of 100 of the biggest companies in India.
Indian Business Leader Priorities...
1. Chief input for business strategy;
2. Keeper of organizational culture;
3. Guide or teacher for employees;
4. Representative of owner and investor interests; and
5. Representative of other stakeholders (e.g., employees and the community).
Some of the identified key differences between Indian and Western bosses...
1. Social Purpose
2. Invest in Employees
3. Take the long view
4. Work from their strengths
5. Act as a role model
Wharton professor of management Peter Cappelli on leadership lessons from India: http://bit.ly/atsfWd http://bit.ly/d97kvg
Peter Capelli presents an interesting perspective... The interesting thing is that many of these practices we do witness happening around us all the time, but, are biases around 'what is best has to be from west' stops us from looking at these; and while I say that, it is not entirely true too, for I have known of a lot of people (read, quite a lot) including me who have been studying these behaviors of indian bosses closely. There are ills as well, which is OK, considering that they are a part of everything & anything; the 'matter which matters' is to look at the replicable behaviors and move forward! So, net net, it makes me feel proud, and it ain't so bad as it looks!
Follow both the links, and read the entire article presented in two forms... He says...
The idea that what is good for business is good for America -- a common phrase in an earlier generation -- seems a distant memory. Where do we look for business leadership?
Let's outsource it!
In an interesting sign of the times, the most impressive business leaders at the moment may be in India. What makes them impressive is a commitment to social goals that extend beyond the interests of their firms and -- here's the good part -- stunningly impressive performance.
They don't appear to be paying any price in terms of performance for being good citizens.
The Indian economy...
> largely sidestepped the financial crisis because of wise banking practices,
> her overall growth rate is second in the world,
> her major corporations are growing at rates of 20 percent to 40 percent per year,
> her companies have been on an acquisition binge, and the evidence suggests that when they acquire foreign companies, those companies perform better.
A study of Indian businesses based around interviews with the leaders of 100 of the biggest companies in India.
Indian Business Leader Priorities...
1. Chief input for business strategy;
2. Keeper of organizational culture;
3. Guide or teacher for employees;
4. Representative of owner and investor interests; and
5. Representative of other stakeholders (e.g., employees and the community).
Some of the identified key differences between Indian and Western bosses...
1. Social Purpose
2. Invest in Employees
3. Take the long view
4. Work from their strengths
5. Act as a role model
Wednesday, February 17, 2010
Portfolio Construct
How Many Mutual Funds Should You Have in Your Investment Portfolio?
This is a trick-question as how many and which type depends upon a host of factors such as my risk appetite, financial goals etc.
Time to take an inventory of your mutual funds. How many are there? What are their investment styles? Is your portfolio of mutual funds cluttered just like your closet? Have you owned some mutual funds so long that you have forgotten why you bought them? Are there some mutual funds on the top shelf, way in the back of your financial closet you haven't even looked at in a while?
Adding new mutual funds to your portfolio is far easier than reorganizing your fund portfolio and discarding inappropriate, redundant, or simply poor-performing mutual funds. The answer to the question of how many mutual funds you should have in your portfolio is not just a number. But if you have many more than eight mutual funds in your closet, chances are you need to do some serious portfolio cleaning; and here's why.
First, in order to be well-diversified, your mutual fund portfolio should be invested in stock mutual funds and in fixed-income mutual funds or income fund equivalents. Within the stock mutual funds, your mutual funds should cover large-cap stocks, small-cap stocks, and mid-cap stocks.
In case you are making investments across the shores, one should cover established firms in industrialized countries and stocks of countries that would be considered emerging markets. While geographic diversification domestically is relatively unimportant, diversification by region for foreign investments is. Representation in Europe for large stock international mutual funds is important, and investments in Latin America and the Pacific Rim are crucial when considering emerging stock mutual funds. Global mutual funds that invest domestically and abroad sound like a one-fund answer, but it is too much geography for one portfolio manager to cover and global funds tend to change domestic/foreign portfolio weights as world conditions change, neutralizing some diversification benefits.
Counting the Mutual Funds
Let's stop and take a count: one large-cap fund, one small-cap fund, one emerging sector fund—so far, three mutual funds. Have we missed the mid-cap stocks? Well, check your large-cap fund and your small-cap fund to see what they include. Usually, large-cap funds leak down into the mid-cap range and small-cap funds push up into the mid-cap range. If not, add a mid-cap mutual fund to avoid any portfolio gaps. Now we may be up to four, all of which are stock mutual funds at this point.
If you want income and the diversification benefit of a fixed-income fund, then a simple choice would be to consider Debt mutual funds with a decent focus towards Government Bonds. These funds on a 3 to 10 year weighted average maturity deliver stability in the portfolio and captures most of the yield of longer-term mutual funds when interest rates change. If you are in a high tax bracket, a stable tax-saving fund might be a better choice. Aggressive investors can reach to high-yield corporate bond funds and while these funds invest in lower-quality corporate debt that pays high income, the individual default risk of the bonds in the portfolio is softened through diversification and the high income dampens portfolio volatility. Furthermore, high-yield bonds tend to be sensitive to the economic cycle, acting more like stocks than government bonds.
So, if we add one to our fund count for a fixed-income fund we have a total of five mutual funds; and another in GILT securities fund would push the kitty to six.
Other Categories of Mutual Funds
What about all those other categories of mutual funds? Do you need a gold fund, sector fund, index fund?
Let's take them one at a time...
Gold mutual funds are concentrated sector funds holding gold mining stocks primarily in North America, South Africa, and Australia. They are extremely volatile, as gold price changes are magnified by the operating cost break-even points of gold mining firms. Do you need a gold fund in your portfolio? No. Most investors use gold funds as a store of value, a hedge against inflation. Over the last decade, however, they have been neither. When stocks are roaring up, you would like your gold fund to behave like a stock, but it tends to act like gold bullion. When the stock market collapses, you hope your gold fund behaves like gold bullion, but unfortunately, it tends to act more like a stock. Hence, I would then rather take a Gold Exchange Traded Fund which is Gold Bullion in that case and would actually provide the hedge the portfolio needs especially given the volatile times we are in.
Sector mutual funds concentrate on one industry or a few closely related industries. Because they are concentrated in an industry, they are not well diversified. Beyond the additional risk, the trick to master is just which sector funds to invest in. At the top of most "best-performing mutual funds" lists will be some sector funds, but they'll also appear on the "worst-performing mutual funds" lists—it's just a question of when. Most aggressively managed stock mutual funds concentrate in some industries and might be viewed as a combination of sector funds. Few investors are willing and able to place sector bets unless they have particular experience in a sector through their education, work experience or vocation, and if they do have expertise, selecting individual stocks may be more rewarding. So, unless there are strong convictions on a sector and one doesn't really have the time to pick up stocks
Do index mutual funds have a place in your portfolio? Yes, but they don't add to the number of funds. They simply are another way of managing your assets in one of the fund categories necessary for a rational, well-diversified, non-redundant mutual fund portfolio. Index mutual funds should be employed in a situation where even the brightest and best of portfolio managers using superior timing and stock selection decisions would have difficulty overcoming the cost advantage of an index fund. Areas of the markets that are efficient, have readily available information, are well-researched and followed closely by the investment community, or are simply not susceptible to very profitable analysis are candidates for indexing. These markets have attributes that make intelligent, thorough analysis more likely to contribute returns that can overcome the cost of active fund management.
Style Diversification in a Portfolio of Mutual Funds
An added classification for domestic funds is investment style—mutual funds can be categorized as growth or value, or both. Growth mutual funds would typically invest in stocks with high earnings growth expectations; value mutual funds would invest in stocks with low prices relative to earnings and net asset values. The style label should be based not on what the fund says it is or what it says it will do, but on what it does. Investment style classification should serve to help investors avoid redundancies and coverage gaps. But they also beg the question, "Should a portfolio of stock mutual funds be diversified by style as well as size of stocks?" Size, yes. Style, perhaps.
Many mutual funds operate in more than one stock size range and many use approaches that are classified as both growth and value. Do you need a value and growth fund in each stock size category? No. One value fund, and it might be the large-cap fund, and one growth fund covering the mid-sized and small stock area provide coverage of size and style. An index fund can be both growth and value, and more extensive indexes will cover value and growth for more stocks and stock size ranges.
Eight Is Enough…
Understanding the style and stock size characteristics of mutual funds will help prevent duplication and unnecessary run-up in the number of mutual funds in your portfolio. Now, back to our count of mutual funds: We left off at six with one fixed-income fund, or seven funds with a fixed-income fund and GILT fund. Add a money market fund and the counter clicks to eight. Be sure you can justify adding mutual funds to your portfolio beyond eight. Make certain you need them, that they truly cover new ground in asset type, geography, or investment style, and that the addition is meaningful.
Taking the time to create an organized, understandable, appropriate and efficient portfolio of mutual funds may be your most important investment.
But, What if one doesn't have time...
Off late, funds with hybrid asset allocation have become popular. These funds invest in different assets (debt & equity) on the basis of predefined asset allocation (moderate / low / aggressive). Also, there are funds with dynamic asset allocation on the basis of statistical models (quant models). Investing in these funds would enable you to have the same exposure to asset classes and reduce the number of overall investments. This is best suited for a person who doesn't take active calls between equity & debt.
The response is inspired by John Markese's response to a similar question put up to him in the AAII Journal, and adapted to the Indian context. John is the President of AAII, the American Association for Individual Investors. I also thank Rajnish Girdhar, Anamika Mattey and Manish Rangwani for their inputs.
This is a trick-question as how many and which type depends upon a host of factors such as my risk appetite, financial goals etc.
Time to take an inventory of your mutual funds. How many are there? What are their investment styles? Is your portfolio of mutual funds cluttered just like your closet? Have you owned some mutual funds so long that you have forgotten why you bought them? Are there some mutual funds on the top shelf, way in the back of your financial closet you haven't even looked at in a while?
Adding new mutual funds to your portfolio is far easier than reorganizing your fund portfolio and discarding inappropriate, redundant, or simply poor-performing mutual funds. The answer to the question of how many mutual funds you should have in your portfolio is not just a number. But if you have many more than eight mutual funds in your closet, chances are you need to do some serious portfolio cleaning; and here's why.
First, in order to be well-diversified, your mutual fund portfolio should be invested in stock mutual funds and in fixed-income mutual funds or income fund equivalents. Within the stock mutual funds, your mutual funds should cover large-cap stocks, small-cap stocks, and mid-cap stocks.
In case you are making investments across the shores, one should cover established firms in industrialized countries and stocks of countries that would be considered emerging markets. While geographic diversification domestically is relatively unimportant, diversification by region for foreign investments is. Representation in Europe for large stock international mutual funds is important, and investments in Latin America and the Pacific Rim are crucial when considering emerging stock mutual funds. Global mutual funds that invest domestically and abroad sound like a one-fund answer, but it is too much geography for one portfolio manager to cover and global funds tend to change domestic/foreign portfolio weights as world conditions change, neutralizing some diversification benefits.
Counting the Mutual Funds
Let's stop and take a count: one large-cap fund, one small-cap fund, one emerging sector fund—so far, three mutual funds. Have we missed the mid-cap stocks? Well, check your large-cap fund and your small-cap fund to see what they include. Usually, large-cap funds leak down into the mid-cap range and small-cap funds push up into the mid-cap range. If not, add a mid-cap mutual fund to avoid any portfolio gaps. Now we may be up to four, all of which are stock mutual funds at this point.
If you want income and the diversification benefit of a fixed-income fund, then a simple choice would be to consider Debt mutual funds with a decent focus towards Government Bonds. These funds on a 3 to 10 year weighted average maturity deliver stability in the portfolio and captures most of the yield of longer-term mutual funds when interest rates change. If you are in a high tax bracket, a stable tax-saving fund might be a better choice. Aggressive investors can reach to high-yield corporate bond funds and while these funds invest in lower-quality corporate debt that pays high income, the individual default risk of the bonds in the portfolio is softened through diversification and the high income dampens portfolio volatility. Furthermore, high-yield bonds tend to be sensitive to the economic cycle, acting more like stocks than government bonds.
So, if we add one to our fund count for a fixed-income fund we have a total of five mutual funds; and another in GILT securities fund would push the kitty to six.
Other Categories of Mutual Funds
What about all those other categories of mutual funds? Do you need a gold fund, sector fund, index fund?
Let's take them one at a time...
Gold mutual funds are concentrated sector funds holding gold mining stocks primarily in North America, South Africa, and Australia. They are extremely volatile, as gold price changes are magnified by the operating cost break-even points of gold mining firms. Do you need a gold fund in your portfolio? No. Most investors use gold funds as a store of value, a hedge against inflation. Over the last decade, however, they have been neither. When stocks are roaring up, you would like your gold fund to behave like a stock, but it tends to act like gold bullion. When the stock market collapses, you hope your gold fund behaves like gold bullion, but unfortunately, it tends to act more like a stock. Hence, I would then rather take a Gold Exchange Traded Fund which is Gold Bullion in that case and would actually provide the hedge the portfolio needs especially given the volatile times we are in.
Sector mutual funds concentrate on one industry or a few closely related industries. Because they are concentrated in an industry, they are not well diversified. Beyond the additional risk, the trick to master is just which sector funds to invest in. At the top of most "best-performing mutual funds" lists will be some sector funds, but they'll also appear on the "worst-performing mutual funds" lists—it's just a question of when. Most aggressively managed stock mutual funds concentrate in some industries and might be viewed as a combination of sector funds. Few investors are willing and able to place sector bets unless they have particular experience in a sector through their education, work experience or vocation, and if they do have expertise, selecting individual stocks may be more rewarding. So, unless there are strong convictions on a sector and one doesn't really have the time to pick up stocks
Do index mutual funds have a place in your portfolio? Yes, but they don't add to the number of funds. They simply are another way of managing your assets in one of the fund categories necessary for a rational, well-diversified, non-redundant mutual fund portfolio. Index mutual funds should be employed in a situation where even the brightest and best of portfolio managers using superior timing and stock selection decisions would have difficulty overcoming the cost advantage of an index fund. Areas of the markets that are efficient, have readily available information, are well-researched and followed closely by the investment community, or are simply not susceptible to very profitable analysis are candidates for indexing. These markets have attributes that make intelligent, thorough analysis more likely to contribute returns that can overcome the cost of active fund management.
Style Diversification in a Portfolio of Mutual Funds
An added classification for domestic funds is investment style—mutual funds can be categorized as growth or value, or both. Growth mutual funds would typically invest in stocks with high earnings growth expectations; value mutual funds would invest in stocks with low prices relative to earnings and net asset values. The style label should be based not on what the fund says it is or what it says it will do, but on what it does. Investment style classification should serve to help investors avoid redundancies and coverage gaps. But they also beg the question, "Should a portfolio of stock mutual funds be diversified by style as well as size of stocks?" Size, yes. Style, perhaps.
Many mutual funds operate in more than one stock size range and many use approaches that are classified as both growth and value. Do you need a value and growth fund in each stock size category? No. One value fund, and it might be the large-cap fund, and one growth fund covering the mid-sized and small stock area provide coverage of size and style. An index fund can be both growth and value, and more extensive indexes will cover value and growth for more stocks and stock size ranges.
Eight Is Enough…
Understanding the style and stock size characteristics of mutual funds will help prevent duplication and unnecessary run-up in the number of mutual funds in your portfolio. Now, back to our count of mutual funds: We left off at six with one fixed-income fund, or seven funds with a fixed-income fund and GILT fund. Add a money market fund and the counter clicks to eight. Be sure you can justify adding mutual funds to your portfolio beyond eight. Make certain you need them, that they truly cover new ground in asset type, geography, or investment style, and that the addition is meaningful.
Taking the time to create an organized, understandable, appropriate and efficient portfolio of mutual funds may be your most important investment.
But, What if one doesn't have time...
Off late, funds with hybrid asset allocation have become popular. These funds invest in different assets (debt & equity) on the basis of predefined asset allocation (moderate / low / aggressive). Also, there are funds with dynamic asset allocation on the basis of statistical models (quant models). Investing in these funds would enable you to have the same exposure to asset classes and reduce the number of overall investments. This is best suited for a person who doesn't take active calls between equity & debt.
The response is inspired by John Markese's response to a similar question put up to him in the AAII Journal, and adapted to the Indian context. John is the President of AAII, the American Association for Individual Investors. I also thank Rajnish Girdhar, Anamika Mattey and Manish Rangwani for their inputs.
Subscribe to:
Posts (Atom)