Investors try out long-term products, pension funds popular choice

The traditional approach to investments is predicated on the assumption that all investors have similar perceptions about their goals and investment objectives. However, recent studies have indicated that rational investment decisions are frequently overwhelmed by emotional biases. Hence, constructing a portfolio with a clear focus on individual goals can result in greater discipline that is essential for investment success.

This becomes ever more important in today's world, where market volatility has increased quite sharply - the standard deviation for CNX 500 for the 5 year period ending March 2011 was 9.46, compared to 7.16 during 2001-06. The increased market volatility can exacerbate behavioural biases such as over-reaction, hindsight bias, mental accounting, anchoring, herding and narrow decision framing.

This is also reflected in the fact that the average holding period of Indian investors tends to be low. At the same time, investors were willing to lock-in their investments for a longer period in goal-oriented products such as pension funds and savings plans for children's future.

Given this background, we believe retail investors might benefit by adopting a goal-based approach to investing. By focusing on individual goals investors are likely to take a holistic view of their investments thereby reducing the short-term orientation and minimising unnecessary portfolio changes by reacting to market fads.

Investors are willing to lock-in their investments for a longer period in goal-based products such as pension funds.

Based on our research into investor and distributor behaviour in India, we have put in place FT Family Solutions, which is a prepackaged investment solution that provides a route for planning for financial goals.

It would appeal to investors who want to take advantage of the time-tested model of asset allocation while planning for their life goals such as retirement and children along with long-term wealth creation.

Such packages simplify the investment process for investors who currently have to invest in a range of mutual funds to achieve their life goals. It gives them a ready-made asset allocation that is customised to suit their profile and needs. Goal-based products also help bring a sense of clarity about the purpose and progress.

They help by-
>> Increasing one's commitment to long-term financial goals and reducing impulsive decisions.
>> Giving a clear picture of how investors are progressing toward each of their goals.
>> Setting the right future expectations rather than those based on last one year's performance.

Also, while financial planning as a concept has picked up in recent years, smaller distributors require a simple and comprehensive asset allocation solution that they can recommend.

Goal-based tools will help them reach out to a large retail client base. Indian investors need simple products and solutions that will help them achieve their goals. We strongly believe that goal-based investing will gain popularity in the coming years, just like systematic investment plan found acceptance.

HARSHENDU BINDAL
President, Franklin Templeton Investments (India)