5 Facts About MFs That Are Purposely Covered From You
Did you ever come across someone who tagged himself as a “financial advisor” and tried to convince you to succumb to his investment plan? Well, don’t get swayed away with his influential sales pitch because this type of person is no good financial advisor, but is merely a salesperson trying to lure you to invest in those mutual fund schemes or products, from where he will reap a significant profit in the name of commission or brokerage fee. The trick that these salespersons play with you is beyond your understanding. They will explain the scheme in detail, highlight all the benefits and shrewdly hide all the demerits that you are going to face on the purchase of the plan. And finally, you are left with no other choice but to believe that this particular mutual fund will yield maximum benefits and hence is the best choice for you.
However, it will be incorrect to say that all the financial advisors are the same because there are many who genuinely make an effort to provide you with the most beneficial mutual fund scheme. But as a precautionary measure, it is better you note down a few facts that are mostly concealed from you by your fund distributor. Keep in mind the below-mentioned 5 hidden facts about MFs before you jump into the final decision of investing in a specific mutual fund scheme.
1. You have been sold one of the most expensive schemes
“There ain’t no such thing as a free lunch.” and the concept of investment fits exactly into this statement. Here, before you realize you have already purchased a costly investment plan under the influence of your advisor. For your better understanding, the cost break-up is provided here that you have to bear as soon as you buy a MF scheme.
- Loads – This is basically the charge fees for a specific MF and is categorized as Loads. The loads amount is levied twice, as entry fee and then as exit fee. But recently due to some amendments, only the latter is imposed. Being the owner of your plan, you are ought to know how much you have to incur as loads cost.
- Brokerage Costs – I would rather say, this is a hidden cost because it is not reflected directly in your investment expenses. Any earnings from your fund by buying or selling shares is the brokerage cost and are included in the Net Asset Value(NAV) and it is directly proportional to the turnover ratio. Higher the ratio, higher is your brokerage expense.
- Expense ratio – This is the total cost covering the administration and fund management fee. As per the recent modifications, for equity-oriented schemes (open-ended) the maximum cap is 2.25% and for other schemes like ETFs, index funds it is 2%. Both are applicable for Assets Under Management (AUM) up to the value of Rs.500 crore. With the change in AUM, the cap covering expense ratio varies consequently.
2. You are unaware of the allocation of your asset
Your mutual fund broker may suggest you to invest in sector funds as the returns are higher there. But very few will explain to you that these types of funds bear the greatest risk as there is a high probability of losing all your hard-earned money. So, to wisely allocate your assets towards equities or debt MFs, tally with your total investment amount across all the debt instruments such as Fixed deposits or bonds. Generally, investing in MFs is a good decision when you have your maximum earning allocated towards FDs and bonds. However, if you are already a shareholder owning a significant amount of shares of big companies, then you need to put some of your wealth on debt mutual funds as well. This is, in fact, the safest way to play the investment game where the risk factor is minimized.
But to be honest, no advisor will explain you this gain-and-loss theory in detail as they are inclined towards earning more and more commissions. Rather, they will persuade you to buy equity funds and New fund offers (NFOs) which draw higher commission fee as compared to debt MF. The more liquid a fund is, the least is the commission fetched by a distributor. So it is up to you to decide which investment plan suits best for you.
3. The fund in which you have invested might turn out to be a bad performer
You have to get this straight in your mind that returns are not always sure-fire. There will be a time when you will be drawing least profit or zero return from your mutual fund investment. But the advisor you have hired for this purpose might not expose this harsh truth before you. He will surely try to compel you to buy a particular scheme on the basis of some financial theories or jargons to which you will unknowingly fall prey and make a decision that you will be regretting in the long run.
Asset Management Companies offer perks like foreign trips and laptops free of cost as commission to advisors in order to reach their target. However, under SEBI regulations this type of upfront commissioning has been banned recently. So, before choosing any particular plan see if your interest clashes with the fund distributor’s interest.
4. Cheap funds are not as good as explained by your advisor
To shoot up their sales, often fund distributors will encourage you to buy New Fund Offers(NFO) that are inexpensive but their NAV will rise faster (as per their research and knowledge). But never fall for these tricks because your return solely depends on the type of stock selection by your fund manager and not on the NAV per unit. You might be told that under your new fund scheme, one single unit worth Rs.10 will be provided to you, which is obviously very low-priced than other schemes out there. There is also a possibility that you will be explained by your broker that your scheme is specially monitored by a star fund manager so that it performs best. But this is absolutely untrue and I will tell you why! Suppose your scheme is Fund A with the NAV worth Rs.10/unit and there is another scheme called Fund B with the NAV worth Rs.20/unit. Now, if both invest in the same company their NAVs will rise in the same proportion with the rise in their share prices. Thus if the rate of rise is 20% then NAV of Fund A will be now Rs.12 and that of Fund B is Rs.24.
So, the closing thought here would be – it’s better to focus on the type of companies you choose for investing and not on NAVs, because no matter how cheap your fund looks, ultimately NAV will fluctuate depending on the stock selection.
5. No one will tell you that SIP is a way better investment instrument
Investing a hefty amount is a wiser decision than SIPs (which are generally in smaller amounts) – This is what generally fund traders will suggest you when you seek their advice. And they will validate their statement by saying that SIP is good for a falling market where stock prices can deteriorate any time and to any extent. On the other hand, lumpsum investment yields higher returns in a rising markets. If you agree to this, you will end up choosing an investment plan of their choice and not yours. But if you are clever enough to analyze and compare the real returns from both the investment type, then perhaps you can save yourself from the false trap of your distributor. As per money-market experts, the ideal way to maximize your investment return is to invest in SIPs in smaller amounts in the beginning and then convert it into substantially larger amount when you start earning higher income like bonus. This way, over the long run you will be in a better position compared to those who selected lumpsum investment option.
Most of the times your MF advisor will hide from you these aforementioned things because their primary focus is to reach their sales target. So, whether a particular fund scheme is profitable or not is solely your concern. It is your job to think judiciously, understand the pros and cons of every investment option and then decide which one is appropriate for you. Don’t just digest everything that your advisor says to you and invest right away. Especially, if you a risk averter and not a risk taker, then this piece is a must read for you. For you, investing in sector funds, small or mid-caps is not at all recommended. However, equity fund is quite a feasible investment choice for you if your risk profile is in a healthy state.