Every brokerage firm wants to sell , sell and sell. So they just want you to buy ,buy and buy. Advertisement for a financial product is just as for any other product in the market. However, there is one big difference; In a financial product, there is no tyre to kick; there is no hardware. Then there is the disclaimer “Mutual Funds are subject to market risks blah blah blah” . So, it is very easy to mis-sell Schemes with fancy names like Guaranteed Income Scheme. How can you expect any guarantee when “ Mutual Funds are subject to market risks …..” ?
In the MF industry , there are three main players; AMC, Distributors and investors. The Distributors are paid by the AMCs commission for every unit of a Scheme sold and the investors bear these costs irrespective of profit or loss they incur. Who bears the cost of running the AMCs ? It is investors again. How do the AMCs charge after all Investors don’t write out a cheque, as fees? The charges are deducted from the NAV (Net asset value) of a unit in the name of expense ratio , the charges for running a MF . An innocuous looking 1.5 % expense ratio can make a significant dent in your returns. For example, Rs 1 lakh over 10 years at the rate of 15 per cent will grow to Rs 4.05 lakh. But if we consider an expense ratio of 1.5 per cent, your actual total returns would be Rs 3.55 lakh, nearly 14 per cent less than what would have been achieved without any expense charge.
An innocuous looking 1.5 % expense ratio can make a significant dent in your returns. For example, Rs 1 lakh over 10 years at the rate of 15 per cent will grow to Rs 4.05 lakh. But if we consider an expense ratio of 1.5 per cent, your actual total returns would be Rs 3.55 lakh, nearly 14 per cent less than what would have been achieved without any expense charge.
An equity MF can charge upto 2.5 % and a debt fund can charge upto 2.25 %. In effect , once a product is sold, for a distributor an one time return is guaranteed and for an AMC, an annual return is guaranteed and only the investors return is subject to market risks !!
With assured outgo of 1 – 2.5 % per annum from your investment, wouldn’t it be prudent to do some check before buying ?
The Net is a boon as well as a bane.
The Net is teeming with analysts and advisors on Mutual Funds. I am wary of clichés like “There’s no free lunch”. Actually in the digital world , there is free lunch with dessert included provided one is careful about his surfing habits and sources. I don’t mean piracy, but legitimate sources of information and data. Generally there is no dearth of places for Gyaan starting from the American “Investopaedia” to our own start up from Bengaluru zerodha . They are excellent free sources if only one is prepared to read. But who wants to read. ? We often hear “yeh sab chhod , batao kaunsa fund thik hai” . People just want the proceeds rather than the process. Just give me a list of stocks or funds to invest in. That’s understandable; perfectly okay. There are places to get such lists also.
Though most of the brokerages publish their general recommendations and bring out free newsletters, the specific recommendations are restricted to paid subscribers. So, to begin with one should study the website of your own brokerage company thoroughly.
Here , I am giving some screen-shots from ICICI Direct Brokerage . I hope it is not an infringement on IP rights. Most of it is in public domain anyway.
Then there is outlook money magazine which brings out a list of Funds every year as OLM 50. Here’s a snap shot .
After investing , unlike Stocks, there is no need to monitor on daily basis as that is what the Fund manager and his team are paid for. However, at-least every quarter one should have a look at the portfolio to decide on ” buy , hold or sell”. If due diligence is done before buying, there would be no need to churn the portfolio too often.
The least one should do is the have a look at the last column of portfolio details on the web site . You won’t be very wrong even if you just follow the recommendations in the remarks columns.
To summarize, firstly, one should avoid falling prey to mis-selling by distributors . Secondly, a little bit of study will help to build a balanced portfolio for growth and stability.
SIP will require a separate post by itself.
A list of links to study for Mutual Funds Pick