The Way To Buy Mutual Fund
A mutual fund, as we all know, is no more a buzzword. The great efforts taken by Association of Mutual Funds India (AMFI) , Securities and Exchange Board of India ( SEBI ), financial planners, financial advisers and other intermediaries who promoted mutual funds, has paid off. Although most of the people now understand what mutual funds are, they still face many difficulties and queries when it comes to investing in them. Which mutual fund is the best? Which mutual fund suits them and, more importantly, what are the different modes available to buy these mutual fund schemes? So, let us put an end to all your doubts on the ways through which you can invest in mutual funds and which types of mutual fund schemes suit various types of investors.
As there are various kinds of mutual funds to choose from, there are many different modes through which you can buy MF schemes. You can choose to invest online or even in the offline mode. You can even choose between the direct plan or the regular plan. Like every other thing, these options also come with their own unique advantages and disadvantages. Depending upon your convenience, level of understanding of mutual funds and your financial goals, you can choose the mode of investing in mutual fund schemes that suits you best.
We will start with the types of plans and then look at the modes through which you can invest in them. We will explain which plan and which mode of investing is suitable for whom.
Types of Plans
SEBI has made it mandatory for all fund houses to have the direct plan of all their mutual fund schemes. This came into effect from January 1, 2013. Following this, all AMCs (Asset Management Companies) came out with the direct plans of all their existing mutual fund schemes. There is actually no difference between the direct plan and the regular plan in terms of underlying securities, which means they derive their value from the same set of portfolio. The only difference is the cost or, in MF terms, the expense ratio. Direct plans are cheaper than the regular plans, because in the case of direct plans, no MFD (Mutual Fund Distributor) or broker is involved. While you do not pay directly to the MFDs in case you invest in a regular plan, it is paid by the AMC. This is reflected in the higher expense ratio of the regular plan.
Direct plan is targeted for people who understand mutual fund and the implications of investing in different schemes and wish to invest on their own without any advice from a financial intermediary or those who wish to invest with the help of SEBI RIA (Registered Investment Advisor).
1. Direct plans are advantageous for those who have good understanding of mutual funds and the market as they can directly purchase them without any middleman.
2. Direct plans are cheaper than regular plans.
3. You may require help of an expert before investing.
1. Regular plans are for those who don’t have adequate knowledge of mutual funds and the markets.
2. They are a bit costlier than the direct plans as they include commissions paid to the middlemen.
3. Mutual fund distributor may help you to some extent while buying mutual funds via regular route
There are different modes through which you can invest in various types of mutual funds discussed above. In the following paragraphs, we will take you through some of the most prominent modes.
Intermediaries are the middlemen that facilitate your financial transaction. They come in various 'shapes' and 'sizes'. Some of the most common intermediaries are banks, stock brokers, large distribution companies, individuals, etc. They would take care of the operational part on your behalf, that is, they will bring the required application form, ask you for required documents, help you in filling the form (most of the time, they fill the form themselves based on the documents provided by you). They also support you in submitting the application form, along with the supporting documents (including KYC) to the fund houses and also provide your account statements as an when required. All these services comes for a fee, which usually is a flat fee.
1. The intermediaries can prove to be helpful if you already know about mutual funds and markets but don’t have time to invest yourself.
2. They can provide you full operational support as far as mutual funds is concerned.
3. They can provide you with the mutual fund investment statements and, to some extent, they would also advice you regarding some of the mutual fund products.
You can take the help of intermediaries if you know which funds to invest in, however, you do not want to go through the pain of operational issues involved while investing in mutual funds, such as getting your KYC done, etc. Nonetheless, if you are tech-savvy, you may not need an intermediary after the initial work has been done.
Independent Financial Adviser (IFA)
Independent Financial Advisers, commonly known as IFAs, are individuals who act as agents and help you to invest in mutual funds. They would help you in filling the application form and also help you to submit the same, along with the supporting documents to the AMCs. Now, you may be wondering how the intermediaries and IFAs are different.
The intermediaries only take care of the operational part. However, IFAs not only take care of the operational part, but also advice you on mutual funds as well as offer services for various other products such as insurance, PMS (Portfolio Management Services), loans, bonds, corporate FDs (Fixed Deposits), etc.
As remuneration, they receive commissions from the companies whose products they are selling, then may be it mutual funds or insurance or any other financial product. They won’t charge you any upfront fee for investments, rather the fund house (in case of mutual funds) would pay a commission on sale of their products. The thing to remember here is that the fund house does not pay the commission from its pocket, rather it pays from investor’s pocket, which gets reflected in the higher expense ratio. IFAs may also provide additional services like financial planning, portfolio designing, etc. apart from investment services, and for this, they may charge you upfront fees. Remember, IFAs may have conflict of interest with you. Though, not all IFAs would work against your interest, but such IFAs are very few in numbers.
Mutual fund may be only a part of the entire offerings of an IFA. He may be dealing with other financial products such as insurance, corporate debts, fixed deposits, etc. Hence, he can give you complete bouquet of financial products that may help you to make a comprehensive financial plan.
1. Apart from selling mutual fund products, IFAs also deal in various other products such as insurance, PMS (Portfolio Management Services), loans, bonds, stocks, etc.
2. Though they receive commission for selling the products, they may also charge a flat fee for providing certain services such as financial planning, tax consulting, to name a few.
3. If you wish to invest in lot of other products apart from mutual funds and also wish to take some of the other services, then you may approach IFA for the same.
AMCs If you don’t want any intermediary or IFA or RIA in-between, then you may also invest in mutual fund schemes by directly contacting the respective AMCs (fund houses). You can even log on to their respective websites and also invest through their websites.
1. Going through the AMC route would only be advisable if you don’t trust any of the intermediaries or professional.s
2. AMCs have made things hassle-free by making all things online. You can visit individual websites and buy the desired mutual funds directly from the AMC.
3. If you wish to buy more than 2 or 3 funds, then it would be better to opt for the online platforms or go through the intermediary route.
Online portals or apps
Apart from the AMCs' websites, you may also use other online portals or even various mobile applications which can help you to invest in mutual funds. Generally, many of the online portals provide you regular plans. However, due to the concerted efforts by SEBI, many big online portals and apps have started providing and promoting direct plans. These online portals and apps also give you basic tools to do a bit of research before investing. They also provide certain basic financial planning tools through which you can decide how much you need to invest and also be able to link those MF investments to a particular financial goal.
1. These are the most convenient modes of investing in mutual funds, whether you wish to invest in direct plans or regular plans.
2. These days, robo-advisory is taking charge, which helps you in making investment decisions.
3. If you wish to invest yourself, then this would be the ideal route for you as it is hassle-free, saves time as well as money.
Assessing the Product Suitability
Now as you may have understood the different modes available in the market through which you can invest in mutual funds. However, knowing only the modes and investing is not sufficient as you also need to know the suitability of a particular product and asset class. So, knowing which product suits you is equally important. But how can you assess which mutual fund suits your requirements? Let’s find out.
There are various methods to assess the suitability of a MF scheme and all those methods need to be used in a synchronised manner and not on a standalone basis. This is because assessing suitability on the basis of just one method may produce different results and may not give you a holistic picture. So what are these methods?
These methods are as follows:
Risk profile assessment
1. Financial planning : Financial planning is a term used by almost all of the financial intermediaries now. But basically none of them provide financial planning in its true sense. They usually do goal planning, which is just one of the parts of financial planning and not financial planning as a whole. So, let us understand what is financial planning and what it involves. Financial planning is a comprehensive evaluation of an individual’s current and future financial situation by using the currently known things and certain assumptions to predict the future situation. Financial planning involves risk planning, investment planning, estate or succession planning, tax planning, cash flow management and financial goals planning.
So it is not just goals, but also certain other things that affect your personal finances. Therefore, the question is: how does financial planning help you find the mutual funds that are suitable for you? Financial planning involves setting up your financial goals which are to be achieved within a certain tenure. While investing in mutual funds, it is very important to understand the time horizon for which you wish to invest. Say, for example, you have a goal which is three years away from now, then investment in equity is not recommended as minimum tenure of investment in equity is 5 years and above. This is because of the volatile nature of returns on equity in a shorter duration. So, technically, investment in equity could be suggested for the financial goals having tenure of 8 years or more. Now, you might ask, why 8 years? This is because it is wise to shift your investments in a safer avenue as you are nearing your goals. So, if you have a financial goal that is maturing in 8 years, then in the initial 5 years, major portion of the investments would be in equity and, in the remaining 3 years, investments should be shifted to the debt funds as it would help you to protect your capital and gains made in the equity schemes. So, financial planning would help you decide the type of funds (equity or debt) to invest in.
Who is RIA? RIA or SEBI RIA is a SEBI Registered Investment Advisor who advises on overall financial situation, and not necessarily only on mutual funds. For giving advice, RIA is prohibited from receiving any compensation in the form of commissions from the investment products. In case they receive any commissions, then they have to disclose the same to their clients to avoid conflict of
2. Risk Profile : Risk profile is another major parameter that helps you understand which mutual fund product may be suitable for you. But what is risk profile and why do you need to assess your risk profile? Risk profile is nothing but a process by which the individual’s reaction on a specific situation is recorded, and based on that, he or she may be categorised under different risk categories. Broadly speaking, there are three major risk categories, namely, conservative, moderate and aggressive. But many have extended these categories to five, viz. conservative, moderately conservative, moderate, moderately aggressive and aggressive and some have also extended them further to include the super aggressive category. So how does risk profile help in understanding which mutual fund is suitable for you? Risk profile shows your risk tolerance. Mutual funds have wide variety of schemes that suit almost all types of individuals under various risk categories. So, if you are a conservative risk taker, then short term debt mutual funds or large-cap equity mutual funds would be more suitable for you. On the other hand, if you are an aggressive investor, then you can also look at investing in thematic or sectoral mutual funds based on your requirements and time horizon. The following table gives you a brief idea as to what should be the proportion of certain major asset classes in the three major risk categories. Looking at the above table, we can broadly ascertain which mutual funds may be advisable for various risk profiles. However, this is just an overview, and as stated earlier, decisions should not be taken solely based on risk profile.
3. Asset Allocation : Asset allocation means allocating assets to a particular financial goal in such a way that it satisfies the time horizon for which it is invested and changes as per the change in the time horizon. For example, say, you wish to save money for your child’s education, which is 8 years away from now, and based on your risk profile, you need to allocate 80 per cent to equity and 20 per cent to debt. So, as you move further where your child’s education is 3 years away, you need to switch 80 per cent that is in equity to debt. Remember, while doing so, you need to periodically rebalance the mutual fund portfolio and bring it back to the original asset allocation.
So, based on the above discussion, you now have an idea of how you can choose a mutual fund scheme. First, you need to assess your risk profile. Say, your risk profile is assessed to be aggressive. Then you need to define a financial goal or objective with a specific time horizon. Based on that, you need to identify the amount that you would require at the end of the defined time horizon. So, in our case, we will assume your financial goal is your child’s education, the time horizon is 8 years from today and the amount required at the end of 8 years is `15 lakh (inflation-adjusted). Now, based on the risk profile and the financial goal, we arrived at asset allocation, which suggests investing 80 per cent in equity and 20 per cent in debt.
Based on the above information, to achieve this financial goal, you need to do SIP of `5,000 or lump sum investment of `8 lakh (SIP and lump sum figures are hypothetical). Therefore, the thing is pretty much clear that you need to invest `4,000 in equity MFs and `1,000 in debt MF via the SIP route and `6.4 lakh in equity MFs and `1.6 lakh in debt MFs via the lump sum route.
Hence, before committing any funds towards MF schemes, it is important to know the avenues available to you through which you can invest, and before investing, you should be clear about your risk appetite, your financial plan and asset allocation. Following these steps will help you to achieve the desired financial goals of your life. Proportions investors should have based on their risk taking appetite