Case of a Mutual Fund Advisor/Distributor
Like all financial products, Mutual Funds too have an intermediary who connects an investor to the Asset Management Company by way of different schemes.
Right from the advent of Private Mutual Funds in the early 90’s they helped in the selection of funds (which was not a big task those days, as the number of funds was a lot less), filling up the form(s) and doing the leg work. Even though the distributors were not too familiar or educated in Financial Planning, they did a reasonably good job for the money that they were being provided by the AMC as an incentive.
The hey days were those of 2.25% entry load and almost 2% exit load, so the distributors were a happy lot with trailing commission of the investments flowing in as long as the investment was there.
This model of commission was in line with that of the LIC agents – whose commissions were intact.
Then in the August of 2007, a benevolent SEBI chairman scrapped the Entry load and the MF schemes suddenly became cheaper. Further on the exit load became less and the further squeeze on the commissions.
However, the trailing format of the commissions still stays on even though it has come down drastically to about 0.6% for equity and to about 0.12% for debt funds.
But what does TRAILING mean?
It means that if you made a modest investment of Rs.1.0 lac in the year 2000 and it has grown to Rs. 10 lac today- then your distributor will get the appropriate commission for each and every year to date on not only the original investment but any successive purchases that you had made. This was a price for keeping you invested and I fully support it because most of the investors need that guidance and motivation from the distributor.
1.But what is their relevance today?
2.Do we need them with the Direct Schemes that the MF companies have launched parallel to each “normal” retail scheme?
3. How safe are these distributors with regards to trusting our money with them?
4.What service are they really providing us with in these times of net transactions?
5. Finally! Can I have a mid way between the Normal Retail Plan and Direct Plan, so that I can pay what is the relevant remuneration for the service?
I feel that I am somewhat qualified to answer this question for two reasons:
1. I had always invested through a MF advisor/distributor for the entire period of my earning and investing life.
2. Though I spread awareness about investment and personal planning, I am not beneficially or gainfully connected with any person or entity who has a business interest in Mutual Funds or any element of Personal Financial Planning.
The Mutual Fund Distributor: is still very relevant today, especially for a new investor and especially for the Seafarers, but only if he is a certified ADVISOR or a DISTRIBUTOR by the SEBI. He should also have an AMFI certification and his “own” ARN NO. Some distributors act as “sub brokers” to the main distributor on some commission sharing basis. These should be avoided as they are not qualified or experienced enough to guide an investor.
I feel that when one starts investing by way of Mutual Fund, one needs to learn a lot of nitty gritty which otherwise he may learn at his own cost…and what is more… an enormous opportunity cost.
It simply isn’t easy to select a good fund with LOOOONG term view. A good advisor/distributor can help you with that.
There are over 1800 Mutual Fund schemes to select from 48 AMCs. For a direct and that too a first time investor this can be a mammoth and a daunting task.
Hence starting off with an A/D is a good and certainly recommended idea. Yes, there comes a time in 3-4 years, in which if you have taken an active interest and your portfolio has satisfactorily progressed- then you may consider going Direct.
However, my experience with fellow investors is that once they start getting good returns from their MF investments and good advice from the A/D, they prefer to stick with him, as the feeling that a small timely advice has saved them lakhs and even a crore at times.
A question you may ask here- How do you know if my distributor of Advisor is genuine or not; or if he is acting in my interest.
Answer: Check your portfolio. If your A/D has ever enticed you to invest in a Closed ended Fund, NFO at the peak of a bull run (because such funds never come in the down turn times). Further on if your share in such funds is actually quite high… then you have all the reason of knowing that the scheme was sold to you for his 4% upfront commission and even attractive trails.
{However you can also kick yourself for not reading my e-book available for free from marineinsight.com :)}.
Answering the Third question is much easier. A Mutual Fund scheme is a contract between you and the MF AMC. The A/D is just a conduit to have connected you to the right scheme or not. He will fill your forms, get your KYC done and kick-start your investment. If you have issued a cheque from your designated account in favor of the MF scheme- even a fly cannot hurt your investments- you are 100% safe.
Mutual Funds are so heavily regulated and hence safe that even you will not be able to invest from an account which is not connected with that particular Portfolio.
The Fourth Question is about their service which they (A/D) provide outside of what we can get on the net.
As you have seen quite often on the net, the amount of information is mind boggling. If Financial Management is not your profession, chances are that you will never get the info which is relevant to you.
An A/D helps you with the precise info and services that you may need.
There is also an element of hidden knowledge. The A/D keep meeting with the Fund Managers of most of the AMCs at various seminars arranged for them for their education enhancement. At these seminars the Fund Managers and even the CIOs/MDs of the AMC discuss long term views of their funds. In addition the A/D gets personal messages and alerts in case government changes or is about to change a policy. This information can be made available to you in good time to benefit.
The final question being if you can find a mid way between going for Retail Plan and paying commission or losing out by going for direct plans.
Yes there can be a mid way- Ask your distributor to go for a Direct plan and set up a commission model with him. Since he gets only 0.60% as trailing commission (that is if your investments continue for the entire year), you can set up a different model which can be beneficial to you and him. I am sure with the great ingenuity that the Indians are blessed with, you will be able to find a good middle road.
I do not think any more queries would remain after this article.
In case you have then post a query here or send me an email on kaushik.the.idiot@gmail.com .
You may also like to read – The Financially Illiterate Mariner – Are You One Of Them?
Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Marine Insight do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader.
The article or images cannot be reproduced, copied, shared or used in any form without the permission of the author and Marine Insight.
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About Author
Rajeeve has been a Chief Engineer for 19 years. He kept his deadline and retired himself on his 50th birthday. With a penchant for reading and writing serious literature and driving long distances, his main hobby is observing and commenting on the economy of the country. He has been helping colleagues at sea by planning their finances and future for over 20 years now. Living in the rapidly diminishing Himalayas, he appreciates every aspect of his beloved country, lying between the Green Hills and the Blue Ocean.
I am a 26 year old seafarer and an avid reader of your articles. I am looking forward in investing in MFs. For sake of flexibility in transactions through net banking I have applied for a ISA account in Hdfc bank linked to my salary bank where I need to pay a maintenance fee of around 500INR per quarter. Kindly advice on the pros and cons on an ISA account and other fees hidden fees when comparing to their modes of MF investment. Also if there are better modes of investment where such flexibilities are available. Thanks in advance.
Hi Sir,
Thanks for the great article. Very informative. I have below query.
For investing in mutual funds what tax status shall we use. Individual or NRE. Do we need to fill in FATCA details? If yes, then what country shall we fill, where we file our tax?
Thanks