Things Not Revealed To You When You Invest In MFs

While buying MFs there are many things that are not revealed to you by the salesperson. DSIJ reveals those things for you.

There are many instances in our life when we come across salespersons who openly call themselves as “financial advisors”, trying to make you fall for their sales pitch. You succumb to their persuasion and end up investing in a particular mutual fund scheme or any such investment product, thinking that the so-called “financial advisor” is thinking about your benefit. However, the truth is quite different from what you think. There is commission or brokerage attached to such products for which they try to lure you and make you invest in the products which may not be suitable for you. Though not all financial advisors are alike, but the count of such financial advisors is less.

  

Next time, before investing in any mutual fund scheme or any such investment product, there are certain things you must know but these are not revealed to you. Some of the things not revealed to you by your mutual fund distributor or your so-called financial advisor are as follows:

1 “I am selling you one of the expensive funds”

Nothing is free when it comes to investment. There are chances that the fund that the MF distributor is pitching you is expensive. Following are some of the costs that come along with mutual funds.

a. Loads : All the MFs charge fees under the head of 'load'. Currently, only exit load is levied, but previously both entry as well as exit loads were levied. However, it becomes important for you understand how much you are going to pay in the form of loads.
b. Brokerage costs: This cost is incurred when the funds buy and sell shares. Although this is not passed on to you directly, it gets reflected in the NAV (Net Asset Value). So look for the turnover ratio of the fund. More the turnover ratio, more the brokerage expense.
c. Expense ratio : Expense ratio is the cost which covers administration and fund management expenses. As per the recent changes, the maximum cap for equity-oriented open-ended schemes is 2.25 per cent and 2 per cent for other schemes (excl. index funds, ETFs and fund of funds) with AUMs (Assets Under Management) of up to Rs 500 crore. As the AUM increases, the expense ratio cap changes accordingly. 

2  “I don’t care about asset allocation”

Say you have most of the amount invested in FDs (fixed deposits), bonds or any other debt instruments, then it makes sense to invest in equity mutual funds, with which you would be able to channelize your investments into shares. On the contrary, If you have already invested in equity mutual funds or shares of certain companies, then it is advisable to also have certain allocation towards debt mutual funds.

Many a time, looking at the returns and prospects explained by the MF distributor, you invest in sector funds. These are the funds which invest in companies of a particular sector such as pharmaceuticals or technology or banking, etc. Though they deliver exceptional returns, they carry high risk. There are chances that you may lose badly.

Very rarely your MF distributor may advice you this way as they try to sell mutual funds through which they earn more commissions. For instance, equity mutual funds and NFOs (new fund offers) fetch higher commissions than debt mutual funds. In fact, liquid funds are among those funds that fetch the least commission for the distributor.

3 “Fund I am selling could prove to be the worst performer”

When it comes to investment in mutual funds, performance of the same cannot be guaranteed. However, apart from the past performance, there are various factors one has to look at before investing. When you ask the MF distributor why he suggested a particular fund, he may through some financial jargons try to confuse you and then you trust him.

To achieve a certain target, AMCs used to give free laptops, foreign trips, etc. However, with the recent changes by the SEBI, payment of upfront commission or even upfronting of trail commission is also banned and, on top of that, AMCs sponsorships in the form of foreign trips or the like or free laptops, etc. are considered to be upfront commission which is banned.

However, it is important for you know whether your MF distributor is having any conflicts of interest with you. 

4  “Cheap doesn’t mean good”

There may be many instances when MF distributor comes to you and tells you to invest in a particular NFO explaining that you will get one unit for just Rs 10 and that it is cheaper than any other fund out there. Further, he may even say that the scheme is managed by a particular star fund manager and this scheme will also perform. First of all, it is important to understand that cheap does not mean good. Let’s take an example to understand this. Suppose there is Fund A, an NFO with NAV of Rs 10 per unit and another Fund B with NAV of Rs. 20 per unit. Assuming both have invested in the same companies in the same proportion. NAVs will rise proportionately with the rise in the share prices. If both rise by 20 per cent, Rs 10 will become Rs 12 and Rs 20 will become Rs. 24.

So the kind of companies the fund manager has invested in matters and not the NAV. Do not be under the impression that the NAV of Rs 10 would rise to Rs 100 overnight. If the fund manager’s stock selection goes wrong, then there is also the possibility of the NAV of Rs 10 falling down to Rs. 8.

5 “Investing via SIP is better”

Many a time, specifically in a rising market scenario, salespersons always try to convince you to invest lumpsum rather than through SIPs (Systematic Investment Plans). If you ask them why not through SIP, then their logic goes like this: Doing SIP is beneficial in a falling market and lumpsum is advantageous during a rising market. Though what the salesperson said is right, as in a falling market you get more units at less price and so you will be able to generate more returns as compared to a rising market. However, SIPs are one of the more efficient ways of investment. The set-up should be: you invest regularly via SIPs and do lumpsum investments when you receive income in lumpsum, such as when you get a bonus. Over the long period, SIPs prove to be much better. However, in some instances, investing in lumpsum also would be beneficial, but investing that extra income earned in the form of bonus via lumpsum would be a good idea.

So these are the things that are not revealed by your MF distributor while selling mutual funds to you. It is prudent to understand this and ask certain questions to them to make them think on whether or not it is suitable for you before investing. Don’t go and invest straight away. Risk profile also plays an important role. Say, if you are a conservative risk-taker, then investment in small-caps and mid-caps or even in sector funds would not be advisable. Though it does not mean that you should refrain yourself from investing in equities, but investment in equities also must be in line with your risk profile.

 

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