How To Find Your Way through the Mutual Fund Maze
Ok, you believe the Indian cricketers (except Virat Kohli – TV ad fee too high!) who tell you 'Mutual Fund sahi hai', and decide to put money into mutual funds (MFs) schemes. How do you go about it?
The first option is—do it yourself. Decide how much risk you want to take and choose the right schemes to match your risk appetite. Easier said than done, especially if you have little or no knowledge about finance. Besides, there are 44 asset management companies (AMCs) in India (those who create the MFs) and, between them, they have over 2,600 different MF schemes. How do you decide which one is best for you? Better not venture alone into this maze.
The next option is – ask someone who knows about all this stuff, maybe the ‘stock guru’ in your neighbourhood, or a friend, who dabbles in stocks and funds. But will you put your hard earned money on the word of just anyone?
The third option is—ask your bank. That relationship manager (RM) who has been hounding you to put money in MFs—surely he is an ‘expert’?
Sorry, bank RMs are not experts in anything, particularly not experts in MFs. They are just salesmen, the derogatory term being ‘sellu’ or ‘bechu’. They will lie through their teeth to get you to buy the schemes which are on their ‘sell’ list. Here is how it works.
Let us go back to the fundamentals of selling. What do you need in a sales job? A product to sell, a profit on the sale, and a buyer. Banks have the buyers—depositors with little knowledge and lots of idle money. Mutual funds companies supply the products and the profit (in the form of commission on sales). The MF company ties up with a bank to sell its schemes for a nice commission. The bank instructs its RMs to ‘push’ only these schemes.
The RMs use their depositors as ‘stuffees’.
Remember leasing—‘lessors’ and ‘lessees’? In the world of MFs, there are ‘stuffers’ and ‘stuffees’. The depositors are the stuffees down whose throats high-commission schemes are stuffed.
What happens if the scheme flops and doesn’t give good returns? If you run to the RM to complain, he will give you some story, and make you sell the scheme and buy another, on which the bank will again get commission.
All right, all right, you may be saying. So better to talk to a ‘real’ expert, isn’t it?
Hmmm-..Yes and No. It depends on what type of expert.
If you are looking for an expert in mutual funds, you may land up with a ‘mutual fund distributor’ (MFD) who will take you through this process:
  • The MFD chap will sit down with you and give you lots of ‘gyan’ about investing and how good his company is at guiding investors.
  • He will do a ‘risk profile analysis’ of you, based on what you disclose about your income, savings, liabilities and financial goals.
  • He will design the ‘ideal’ portfolio for you, composed of various 'absolutely the best' fund schemes.
When you are totally overwhelmed and venture to ask how much the MFD will charge you, he will magnanimously say 'absolutely nothing—totally free service'.
Wow!! All free? You reach for your cheque book.
Beware! There is no free lunch and no free service. The MFD will earn commission from the funds of up to 3% up front and, thereafter, keep getting a ‘trail’ commission year after year if you scheme on to the fund. This commission comes out of your investment, i.e., if you put in Rs100 you actually receive Rs97-Rs98 worth of units of the MF scheme.
But a more likely scenario is that the MFD will periodically ‘churn’ your portfolio, i.e., make you sell the scheme you have and buy other, ‘better’ ones. Every time you put money into yet another scheme, the MFD will get a commission. You can be pretty sure that every scheme that the MFD makes you buy is one in which it gets the best commission, not one which serves your interest the most.
Oh, cruel world of MFs!
Is there nobody who will give you honest advice, one that is good for you and not for him?
Yes there is, but there is a catch. It is not free. You have to pay a fee.
We Indians are used to paying fees for many services, such as fees to a doctor, a lawyer, or even a small tip to a delivery man. But when it comes to paying a fee for investment advice, people are strangely reluctant, perhaps because the MFDs give ‘free’ advice.
But the fee for investment advice actually costs you nothing!  Let me explain.
The Securities and Exchange Board of India (SEBI) has set down rules for two types of MF experts: MFDs and registered investment advisers (IAs). I have already told you about how the MFDs work. Let me tell you about the other lot—the IAs.
My friend, and erstwhile colleague, is an IA, registered with SEBI. Currently, he is busy studying for his exams. He is almost as old as I am—68, and he has been in the investment business from the time his beard was wispy and black, whereas today it rivals Modiji’s beard in whiteness and abundance. Yet, SEBI has stipulated that he must pass an exam called the National Institute of Securities Markets (NISM) periodically, to keep in touch with market trends. Further, since he has set up a 'corporate' by bringing in Rs50 lakh as capital, he has to acquire a post-graduate degree (minimum 2-year course, none of this 12- and 18- month stuff). So he has to study.
I feel these stipulations are an overkill for a budding type of expertise in a market where only 4% of savings go into MFs (real estate, gold and fixed deposits are the preferred savings routes in India) compared to 40% in the US. Perhaps because of these stipulations, the number of IAs in India is miniscule, to be counted in hundreds. Nevertheless, SEBI’s bureaucrats have decided to copy the developed markets in setting these norms—hence SoBI it.
An IA will charge you a fee based on the amount you invest, typically 1%-1.25% per annum of the investment amount, or you can agree to a flat annual fee of Rs1.2 lakh or more for your total investment. But the IA does not get any commission from the fund schemes you buy, unlike an MFD who suggests various schemes and gets a commission of 2% or more from your money. The MF companies charge you an entry fee of typically 1% when you buy a ‘direct' fund, i.e., a zero-commission fund, through an IA, so that you get Rs99 worth of MF for every Rs100 you invest.
Net net, you pay the same whether you deal with a MFD or an IA—2%-2.5%.
Additionally, an IA is required to take care of all the nitty-gritties associated with investing in MFs – movements of money, tax returns and market overviews, which an MFD is not required to give you.
The bottom line is – an IA gains nothing by recommending any one scheme vis-à-vis another. His only concern must be to keep your money safe and get you the best returns in line with the risk level you are prepared to take. If he doesn’t perform, you can dump him and find another IA.
By now, you know I have gone the IA route. Which route would you choose?
(Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world (until Covid, that is), playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.)
Ramesh Popat
2 years ago
millions of investors have no time to track market and no in depth
knowledge of MFs. so many variables in investments. mistake in
plan may have long term loss or less return. Goal setting, Asset
allocation, performance review is not everybody's job.
Distributors are doing the job with 'minimum' cost of all.
doctors, lawyers, bankers selling mf products, fintech cos,
brokers ..all charge hefty hidden fees. Real distributors take
care of so many things for the investors. Hence pl. donot
paint all distributors with the same brush.
2 years ago
Why worry about passing a 2 year University course. Simply complete one by correspondence from the lowest ranked University accredited by UGC. I understand the PhD degree of Hon. Minister for Education is from a University that is not even accredited.
2 years ago
Moneylife prescribes a list of better MF under respective categories. One may also consult Valueresearch. You can always check the composition and trends of the fund holdings in Moneycontrol to see if those holdings are in line with your knowledge ,opinion, understanding and preference. Total Expense ratio of Equity Funds is as available here:

Cutting out the "advisor" and going direct would save you 1 % which is what the Distributor earns. There will be good advisors and there will be others who encourage churn based on who will generate them the best commission. Even the major banks acting as Distributors usually have their own best interests at heart. It needed a Zerodha to come along and expose the profiteering in so called "full service" broker trading commisions.
Amitabha Banerjee
2 years ago
Dear Readers, I had no intention of making misleading comments because I have no vested interest at all in any party in the MF business. If I have given offence, I apologise.

The point of my article is :
- Unless you make investment decisions on your own, you will pay 2-3% on your MF investments, directly or indirectly.
- Paying a fee for sound advice from a knowledgeable source, which has no conflict of interest, is what we all do in other aspects of life - medicine, law etc - then why not in investments?
2 years ago
Mr Banerjee expense ratio of MFs is capped at 2.50% or 3%. How come the fund house pays upfront or 3% and then trail also to MFDs. Are you sharing information about US markets or India. Please be clear. If you are talking about India then you must do some more homework and share the true numbers. Your article is misleading...... and seems biased. Moneylife is s decent brand and we follow it for information and guidance. Any unfounded statement hurts our interest as an investor. Be unbiased and if there is any fact in your statement regarding charges, please share which fund house do it, so as we stop investing with them.
2 years ago
What about one time fees only RIA (SEBI) 's Rgistered Investment advisors.
2 years ago
"We Indians are used to paying fees for many services, such as fees to a doctor, a lawyer, or even a small tip to a delivery man. But when it comes to paying a fee for investment advice, people are strangely reluctant, perhaps because the MFDs give ‘free’ advice."

This! Thank you for pointing out this! This is important! Excellent article.

This is the reason many advisors pivot to PMS and other services because it's incredibly hard to charge for standalone advisory let alone educate the consumer. Nobody will pay Rs1.25 lakh (the max limit as per new norms) for advisory. It's easier to be a broker and give "advice" than be an IA. It is easier to sell a PMS and manage assets than give advice. The irony is PMS, MFDs and brokers, research analysts, et al, all charge more or less the same percentage. Of course, consumers do not know this. Financial literacy is the need of the hour.

The regulatory structure is so "loose" (or is it "tight"? I can't make out the difference, honestly) that practically the same "entity" can be an advisor, research analyst and PMS, stock broker - all bundled into one -- by having separate entities and licenses, all within "arms length" of each other! There are so many of these.

Unfortunately, this is India, not Singapore or Switzerland. This speaks volumes of financial illiteracy both on regulatory and consumer levels. I really thought that the IA regulations were the best thing to happen in India when it came out in 2013. Since then it's gone through several iterations and has been diluted. It's a joke now. We're back to square one.

Who are the losers? Fiduciaries and consumers, consumers mostly.
Replied to adityag comment 2 years ago
I 100% agree with article and the comment posted by you.
Kamal Garg
2 years ago
The article is misleading and full of concocted stories, to say the least.
First, there is no upfront commission of 3% which is paid to a MFD. It does not exceed more than 1% in any case. And further, SEBI is trying to shift some part of this 1% also into trail commission. So the point is that SEBI wants one to invest for a longer period.
Two, there is no "entry fee/charges" of any kind in any of the schemes run in India by any AMC/MFs. If some one has invested Rs. 100, her invested corpus on the zero day would be Rs. 100 only - nothing else.
It is bizarre that some one as respected and reputed as Amitabha Banerjee would write such false and misleading stories and Moneylife would publish it without checking it at their end.
Replied to Kamal Garg comment 2 years ago
Mr Garg could be connected to MFD ?
Kamal Garg
Replied to RVR comment 2 years ago
???. Sick comments. Let it go.
Replied to Kamal Garg comment 2 years ago
I think the author meant expense ratio. This is charged to the consumer.
Replied to adityag comment 2 years ago
Kamal Garg
Replied to adityag comment 2 years ago
You can't be wrong and give misleading article/blog in such a reputed magazine. There is a sea of difference between the TER and upfront commission paid to an MFD. Further there is no entry load of any nature, whatsoever.
Any how, the TER is also capped at 2.50 to 3.00% for all the equity schemes.
2 years ago
There is no entry load of any kind when you buy direct or with a distributor. Exit load is charged depending on type of mf you bought.
2 years ago
Follow the World Trend. Go Passive. Nifty, Next Nifty or Sensex Index Funds Direct Plans are enough. Cuts RIAs, RMs, MFDs and Fund Managers.
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