In my last post, I questioned the suitability of equity-oriented schemes for someone wanting regular income. In response to that, one reader, an advisor, wrote in to say that I had not presented the “full facts”. He sought to draw my attention to the ‘Moneyback’ feature offered by ICICI Prudential Balanced Advantage Fund, and said that this helped overcome the limitation of irregular or inconsistent dividends. He made a reference to a presentation that had been made by someone at ICICI Prudential where some calculations were shown that, according to him, proved the merits of this feature.
For the benefit of those who are unfamiliar with this feature, let me offer a quick explanation. As far as I can make out, the ‘Moneyback’ feature is somewhat similar to a Systematic Withdrawal Plan. By opting for it, an investor compulsorily gets back 0.75% of his investment amount each month. In simple terms, that translates into a withdrawal rate of 9% p.a. Compounded, that works out to 9.38% p.a. This money is withdrawn on the 25th of each month. I was aware of this feature when I was researching for my last post and I made a subtle, passing reference to this, without any details. Based on my understanding of risks in making regular, fixed amount withdrawals from equity schemes, I had written off this feature as dubious. But to be honest, I had not seen any calculations at that time, nor had I done any of my own.
After hearing from this advisor, I decided to look around and see if I could find any of the calculations that the people at ICICI Prudential had put together. It didn’t take me long before I zeroed on to some material that someone had uploaded online. It seemed that this material had been made by ICICI Prudential for introducing the ‘Moneyback’ feature to its “distributors and advisors” and had been labelled as “Private and Confidential”. Call me cynical, if you like, but I have come to believe that for many fund houses, more often than not, this label acts as a cover to give out misleading or inaccurate information.
In the material on hand, among other things, I found a “Back Tested Illustration” of how the ‘Moneyback’ feature would have worked out for a hypothetical investor. The calculations assumed that this person invested 10 lakhs in Balanced Advantage Fund on 1 Aug 2012 and opted for ‘Moneyback’ from the second month onwards. The result of this was then evaluated as on 25 Aug 2015. This showed that, after making 36 monthly withdrawals, the value of the investor’s outstanding units would have stood at 13.66 lakhs. I presumed that these were the calculations that the advisor was referring to.
Right away, I felt suspicious about this so-called “illustration”.
Firstly, it covered too short a time period. If one wanted to test a withdrawal strategy, and not be accused of deception, at the very least one should have picked a time period over which the withdrawals equal or exceed 100% of the amount invested. In their illustration, the 36 withdrawals totalled to just 27% of the amount invested. If they wanted to present an unbiased picture they should have considered a time period of over 11 years (or at least as long as possible, given that the scheme has been around for over 9 years).
Secondly, when it comes to withdrawing regular, fixed amounts from equity schemes, an investor’s returns are impacted by the starting point and the sequence of the scheme’s returns. Hence, to present a truly clear picture of risks involved, especially given the shorter time horizon that they chose, ICICI Prudential should have considered rolling periods. That they did not do so, raised questions about their understanding and/or their intentions. That they used rolling periods in calculations elsewhere in the material, made me suspect their intentions. Worse, they chose a start point and end point that was highly likely to be favourable for a hypothetical investor, as evidenced by the PE Ratio of the NSE-50. At the start point, the PE Ratio was 17.13 while at the end point it was 21.83.
But what if the investor had invested over a different, maybe longer time horizon?
To avoid framing bias, let’s expand the time horizon and start from 1 Oct 2007 (PE Ratio: 22.79) and end on 26 September 2016 (PE Ratio: 23.94). Now, that’s a period of almost 9 years. So what would have happened? An investor would have made 107 withdrawals but the value of his outstanding units would stand reduced to 8.78 lakhs (see here). But that’s not all. The journey that such an investor would have taken would have been so harrowing that he/ she may not have chosen to stay the course. Let me explain.
If an investor had indeed started off on 1 Oct 2007, by the 5th month itself, the value of his/ her investment would have fallen below 10 lakhs and it would not have come back at any time (till date) above 10 lakhs. Not only that, for a continuous period of 6 months along the way, this investor would have seen the value of his/ her investments at below 6 lakhs. Think about that for a moment. Is this something that an investor looking for regular income would be willing to live with? I can’t even begin to imagine what that investor would have felt, thought or done.
I firmly believe that if we have any consideration for those investors who depend on fixed, regular income, then we shouldn’t be peddling equity schemes for that purpose. And even if an investor is someone who, for no particular reason, has a whim or a fancy for deriving such income from equity schemes, at the very least we should clearly lay out the vast difference between the best case scenario and the worst case scenario.
For whatever you may find it worth, if this hypothetical investor had, over the same period, invested in ICICI Prudential Income Fund, and made an identical number and amount of withdrawals, his/ her investment at the end would be worth 10.25 lakhs (see here). To be clear, I am not trying to suggest that an SWP in a debt scheme will necessarily give better returns. But you might consider the fact that at its worst moments, it is likely to cause less heartburn than an equity scheme.
As it turned out, this deceptive illustration was just one of many examples of misleading/ inaccurate information that I could find in the material. Here are some more:
- Balanced Advantage Fund was described as being “suitable for monthly tax-free income”. That’s in direct contradiction to what is mentioned in the official fact sheet.
- In talking about the chances of their inability to pay monthly dividend, they called such a situation “rare and exceptional”.
- There was a table that compared this equity scheme with Post Office MIS, PPF and other fixed return instruments. On every parameter that they chose to compare, this scheme was shown to be better than the others. The risks involved in each of these was not a parameter but reduced to a vague footnote in small print.
- There was another table comparing 3 year rolling returns of the scheme with that of the BSE Sensex and emphasis was placed on the fact that the scheme’s minimum 3 year returns had been 6.26% pa. But for reasons only known to them, the table only covered investments made from 1 March 2010 onwards whereas the scheme has been around for much longer. If one were to look further back, the 3 year returns for the scheme have been as low as 1.35% p.a.
I can go on and on.
In my last post, I suggested that somewhere between ICICI Prudential, its advisors, and its investors, the message of this scheme’s suitability may have got lost. What I observed in this material shows that what ICICI Prudential is communicating to its advisors is where the problem begins.
For far too long, fund houses have been allowed to get away with making misleading statements and concealing key information and risks, by labelling material as “private and confidential” and “for advisors and distributors”. To be fair, I don’t think all fund houses are alike- some are more diligent in their communication to advisors, most are not. But I can’t think of anything that relates to a scheme that would merit being “private and confidential” (even commissions paid are now going to be out in the open). Moreover, I believe that anything about a scheme that is good for advisors to know, is good for investors and prospective investors to know as well. I think it’s time SEBI took a good hard look at what advisors and distributors are being told.
