William Shakespeare had said "A rose by any other name smells just as sweet". However, marketing heads of companies will disagree with Shakespeare's observation. According to them, a juicy twist to a fact helps in communicating the message better than merely conveying the bald truth. In other words, they are always attempting to frame a fact in the most effective manner. A mutual fund advertisement can state a fact in two ways:
A mutual fund could either state that one of its schemes had a 5 year CAGR of X % while the Sensex only grew by X-2 % during the same period. Or, it could state that if you had invested X amount in our scheme, in July 2011 it would have grown to 1.5 X today, while the same money would have grown to only ₹ 1. 1 X if you had invested in an index fund.
But when you say the first sentence - the reader will look at only a 2 percentage point difference. On the other hand, the difference in amount is of nearly 50% is most likely to have a much-greater impact.
Now, here is how it can be used wrongly, as well. When a new fund offer (NFO) is launched, MF distributors will approach you and say that it is cheaper than an existing scheme with a track record. The argument: The units are available for only ₹ 10 while that of an existing scheme is ₹ 100. "So, with ₹ 10,000, only 10 units of existing scheme can be purchased, whereas you can buy 100 units of the NFO".
Now, both the schemes grow by 20% in one year. So the NFO's NAV becomes ₹ 12 and the existing scheme's NAV is ₹ 120, how much will your ₹ 10,000 grow? It will be ₹ 2,000 in both cases. So, the cheaper positioning is wrong.
Why is this framing used? Before engaging in any activity or making any purchase, all of us are keen on knowing 'what’s in it for us?'' Alluringly framed messages answer this question by underlining how the product or service can enhance the purchaser's quality of life. This is superior to merely listing out the product’s positive attributes. But one has to come out of the frame and think about his/her action rationally.
In the case of MFs, while advisors are convinced about the merits of long-term investing, clients often do not appear to share this conviction. During such times, it may be worthwhile to go back to the drawing board and frame some compelling messages which may help the cause.