Monday, August 3, 2009

MUTUAL FUNDS IS DEAD!! LONG LIVE MUTUAL FUNDS!!!

PAYING FEES TO YOUR ADVISOR IS INEVITABLE

If you ready to pay me, Raise your Hands,

If not, Raise your standards...


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With the ban on Entry loads, it is inevitable that Mutual fund Advisors charge consultation fees.

SEBI has virtually killed the Mutual Fund distribution business. Now distributors will SELL ULIPs which give them 40% approx commission instead of Mutual Funds which give them ZERO commission. SEBI is telling Distributors to take two different cheques from investors. One for his investment, one for your fees. Advisors, if they find investors unconvinced about paying Fees, will not Service these Small Investors at all.


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Even if the investor goes directly to the fund house, Can the Investors be sure of unbiased recommendation by the AMC????

Incidentally, last year SEBI has abolished entry load for direct applications yet only 10 per cent of fund investors since then have actually chosen to go directly to the fund. This just goes on to show that investors need the support of advisors to decide on the investment.

Imagine buying a shirt for Rs600 and giving two cheques, one for the manufacturer for Rs450 and one for the shopkeeper for the remaining amount. This is the same thing. It is not going to be easy to convince the consumer what he is paying for.

Not only for selection of Funds, if a customer wants services such as consolidated statements, portfolio advice, etc., he would have to pay for it.

Working out a client’s risk profile is a serious business and can take up a lot of time.

SEBI has been doing a great job all these years in terms of investor protection and the waiver of Load is a Welcome step that will no doubt benefit the small but informed investor. I use the word 'informed', but what about the uninformed investor???

The way ULIPs are advertised and promoted, it is difficult for an uninformed investor to differentiate and tell apart a mutual fund from an ULIP product.

Distributors will definitely pitch for ULIPs because of HUGE commission compared to NIL commission in Mutual Funds. It is here that SEBI should not have signalled out Mutual Funds separately. Why would a distributor sell MF schemes where he earns nothing, when he can sell a ULIP product and get a very high commission

India had just 0.3 percent of the $18.97 trillion global asset management industry in 2008, and only 7.7 per cent of its household savings went into mutual funds as compared to 26 percent in the UK, according to data compiled by KPMG.


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BUT THERE IS A SILVER LINING BEHIND THE DARK CLOUDS

Not everything is gloomy. Because of the Ban on Entry load, Mutual Funds have the Cheapest form of Investment. As more and more people start getting this into their head, they will shun ULIPs and will pitch for Mutual funds.

The scrapping of entry load would ensure responsibility and accountability and would act as a key differentiator between a good and a bad financial planner.

Investors too will shift towards seeking Professional Advise and Portfolio services backed by Strong Knowledge and Research, enabling them to select from over 300 Equity Schemes available in the Market. Likewise, they WILL willingly pay Fees to the Advisors.


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WHAT SHOULD YOU, AS AN INVESTOR, DO???

Dear Investors, do not get into a trap by scouting for a NO COMMISSION Distributor. He may be selling you a Fund with a Poor Track Record on which he receives 'internal' commission. That may not be the best fund for your portfolio. Please bear in mind that a consistent long term track record and a risk profile that suits your appetite should be the key factors that determine your investment choice.


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Ensure that you are not sold an ULIP when you do not want one. ULIPs are long term insurance-cum-investment products. They generally build in expenses upwards of 10 per cent, in the initial years. This sum would be deducted from your investment amount.

So as an investor, what should be your response to this change?

As always, ensure that you choose a fund based on its track record. Expenses or commissions come next.

Do not be diverted into buying ‘other’ products if your objective is to buy a mutual fund

If you are a less-informed investor and need advice, do not hesitate to pay a decent sum to a good financial advisor/distributor. THERE IS NO SUCH THING AS A FREE LUNCH.

If you are a well-informed investor, making your own investment decisions, you can apply for funds directly through their portals or approach any of the local offices of the fund house you want to invest in. This way there would be no commission. If you wish to make such an investment through your online broking account, you may do so; this would however entail paying a fee.


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However, do note, for every follow up services, like statement of account, dividend not recd, you may forced to leave your work and spend more than 2-3 hours of your precious time.


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FINALLLY,



DO NOT HESITATE TO PAY YOUR MUTUAL FUND ADVISOR. THERE IS NO SUCH THING AS A FREE LUNCH. IT IS NOT A JOKE TO ZERO IN ON THE BEST FUND FOR YOU INVEST (DEPENDING ON YOUR PROFILE) AMONG MORE THAN 300 FUNDS.

I will retiterate what I have said right at the beginning...

If you ready to pay me, Raise your Hands,

If not, Raise your standards...


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Best of luck,

Srikanth Shankar Matrubai

Also visit

http://equityadvise.blogspot.com

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