Mutual funds are a category of financial products that are sold or rather pushed by commission-earning national distributors, financial advisors and banks. The assets under management of the Indian mutual fund industry at the time of writing was around Rs. 16 trillion comprising 700 debt funds and 500 equity funds. However, mutual fund penetration in India of 7% share of Assets under Management (AUM) of mutual funds to GDP, inspite of three decades of business in India, is abysmally low as compared to above 50% penetration in developed economies such as US, France, UK and Germany.
Mutual fund companies spend thousands of crores on expensive full page ads in leading newspapers, television commercials and investor education campaigns in an attempt to make consumers aware about mutual funds and why they should invest in them. However, most attempts to educate people include heavy doses of complicated financial jargons like rupee cost averaging, net asset value, market volatility, risk diversification, asset allocation, multi-asset strategy, power of compounding, equity fund, debt fund, hybrid fund, arbitrage fund, liquid fund, index fund, exchange traded fund...you get the drift, these are words that are alien for most people who are not connected to financial markets. Most of such awareness campaigns include tips like 'one must start investing early' whereas the target audience for such communication have already past the age of 'starting early'. Other tips include wishful thinking like be a disciplined investor, think long term, be systematic and execute goal-based plans. Such education is ineffective and money-draining because Indians don't behave like this nor do such efforts change people's behaviour.
In fact, behavioural science studies like the one by Fernandes, D., Lynch, J. G., & Netemeyer, R. G. - Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861-1883 (2014) - a meta-analysis of over 200 financial programs focusing on educating investors - has found that the largest effect any of them had was a mere 0.1%
Briefcase's research in the financial capital of India - Mumbai - amongst beginner investors who are likely to be married, probably have or having a child and are looking for avenues to invest their money, shows evidence that such an audience has a very vague understanding of mutual funds. One thing they know for certain is that 'mutual funds are subject to market risks, please read the offer documents carefully before investing'. As a result, people are apprehensive of mutual funds and it takes them anywhere close to 2-3 years to begin investing a small proportion of their money in mutual funds! Beginner investors do not even use the word 'invest' or 'investments'. Rather they tend to refer to investments as 'savings'. Leave alone the cognitive challenge of choosing a fund from over 1000 of them, beginner investors don't even get the concept of a mutual funds well enough.
At Briefcase we have developed a concept for Franklin Templeton, based on behavioural science, that repositions mutual funds in a way no other organization has looked at before. The attempt is to make the concept of mutual funds so easy to grasp and intuitive that even a housewife who is not into investing 'gets it'. Further, the concept applies cutting-edge behavioural science to make mutual funds highly persuasive. You could think of it as cracking the code to sell mutual funds to beginner investors.
Few of the behavioural science principles applied by us to reposition mutual funds are:
Human behaviour is contagious. We all do as others do.
In a hotel experiment conducted by Robert Cialdini, Noah Goldstein and Griskevicius, different kinds of signs were placed in hotel bathrooms. One of the signs asked guests to help save the environment by re-using their towels. The second one informed them that the majority of guests at the hotel recycled their towels to help save the environment - achieved success rate of 26% more than the first sign. A third sign informed guests that majority of people who had previously stayed in their particular room recycled their towels to help save the environment - success rate of 33% more than the first sign.
A five-star review on Amazon leads to approximately twenty more books sold than one-star reviews. Behavioural science studies show people dress in the same styles as their friends, pick dishes preferred by other diners, choose restaurants which are more crowded, more likely to get fat if people around them become obese, are more likely to quit smoking if their friends quit, pay taxes if others are paying, vote if their spouse votes. So our concept informs investors how many people like them also invest.
Sources: 1. Schultz, P. Wesley, Jessica M. Nolan, Robert B. Cialdini, Noah J. Goldstein and Vladas Griskevicius, "The Constructive, Destructive, and Reconstructive Power of Social Norms", Psychological Science 18:429-34 (2007)
2. Kelman, H. C. (1 March 1958). "Compliance, identification, and internalization three processes of attitude change". Journal of Conflict Resolution 2 (1): 51-60.)
3. Cai, Hongbi, Yuyu Chen and Hanming Fang - Observational Learning: Evidence from a randomised natural field experiment - American Economic Review 99, no.3: 864-82 (2009)
4. Noah J. Goldstein, Robert B. Cialdini and Vladas Griskevicius - A room with a viewpoint: Using social norms to motivate environmental conservation in hotels - Journal of Consumer Research 35:472-82 (2008)
5. David W. Nickerson - Is voting contagious? Evidence from two field experiments - American Political Science Review 102: 49-57 (2008)
6. Nicholas A. Christakis and James Fowler - Connected: The surprising power of our social networks and How they shape our lives (2009)
7. Behavioural Insights Team - erstwhile cabinet office of British Government
8. Gary S. Becker - A note on restaurant pricing and other examples of social influence on price - Journal of Political Economy 99, no. 3: 1109-16 (1991)
9. Chevalier, Judith and Dina Mayzlin - The effect of word of mouth on sales: Online book reviews - Journal of Marketing Research 43, no.3: 345-54 (2006)
Too much choice leads to indecision and lower sales.
Sheena Iyengar and Mark Lepper set up a display at a supermarket in which passersby could sample a variety of jams that were made by a single manufacturer. Either 6 or 24 flavors were featured at the display at any given time. Results - only 3% of those who approached the 24-choice display actually purchased any jam. In comparison 30% bought when the choice was between 6 flavors.
Behavioural scientists Sheena Iyengar, Huberman and Jiang analyzed retirement programs of 8,00,000 workers in the US and found that when only 2 funds were offered, the rate of participation was around 75%, but when the 59 funds were offered, the participation rate dropped to about 60%.
Likewise, our concept is simple and easy to understand, without any jargons, ensuring there's no cognitive overload for beginner investors.
Sources: S.S. Iyengar and M.R. Lepper - When choice is demotivating: Can one desire be too much of a good thing - Journal of Personality and Social Psychology, 79:995-1006 (2000)
S.S. Iyengar, G. Huberman and W. Jiang - How much choice is too much? Contributions to 401(k) retirement plans - Pension design and structure: New lessons from Behavioural Finance, Oxford University Press: 83-94 (2004)
In an experiment by behavioural scientists Bornstein, Leone and Galley, the faces of several individuals were flashed on a screen so quickly that later on, the subjects who were exposed to the faces in this manner couldn't recall having seen any of them before. Yet, the more frequently a person's face was flashed on the screen, the more these subjects came to like that person when they met in a subsequent interaction. These subjects were also more persuaded by the opinion statements of the individuals whose faces had appeared on the screen most frequently. That happened because greater familiarity led to greater liking led to greater social influence. One of the main principles of behavioural science is that to get people to change their behaviour, we need to make the unfamiliar, familiar. Therefore, to make people understand the concept of mutual funds, our concept draws heavily from what people are already familiar with.
Sources: R. F. Bornstein, R. Leone and D. J. Galley - The generalizability of subliminal mere exposure effects - Journal of Personality and Social Psychology 53:1070-79 (1987)
J. E. Grush, K. L. McKeough and R. F. Ahlering - Extrapolating laboratory exposure experiments to actual political elections - Journal of Personality and Social Psychology 36: 257-70 (1978)
Briefcase's concept of repositioning mutual funds for beginner investors is simple without complicated jargons; makes decision-making easy by not having complicated product details; relies on intuitiveness and ease of understanding because it's proven that humans are not good at financial planning; is brief because attention spans of people are limited; does not include pie-charts and tables because they are complicated and nobody understands them; restricts the use of numbers because most people are bad at math; does not include any cliches like 'start early' and 'every rupee counts' because they don't make any difference. On the other hand, it uses powerful principles of behavioural science to simplify the concept of mutual funds, making it more persuasive as an investment option, keeping mutual fund regulations in mind.
If you would like to apply Briefcase's simple and highly persuasive method of repositioning mutual funds, for beginner investors, based on behavioural science, please get in touch with us.