Retail MF Investors … It’s Your Hard-earned Money. Take These 10 Precautions
The mutual fund (MF) industry comprises of 41 asset management companies (AMCs) in India managing 1,916 schemes with a net asset under management of Rs22.26 lakh crore as of 31 March 2020. MF schemes come in all shapes and sizes with numerous permutations and combinations. Decision making process with respect to investment in mutual funds has become very difficult in view of this voluminous data. Thus, retail investors depend heavily upon the wisdom of the distributors for their investment decisions.
 
Individual distributers are associated with a few fund houses. Institutional distributors generally build a team of financial experts for their wealth management activities. The same team analyses various mutual fund schemes and freeze upon a set of seven to eight recommended schemes. These schemes are downloaded to the front office system (FOS) to sell. Distributors are hugely biased towards mutual fund houses that gives them maximum upfront fees, trail commission, reimbursement of client expenses and of course sharing of R&R expenses. FOS are literally bullied to ensure sale of the recommended schemes. Good sale numbers result in career growth, higher incentives and invitation to R&R events. 
 
Thus retail investors are handicapped right from the word go. They get biased, incomplete information and are generally coerced into taking decision by these parroted generally unqualified FOS with incomplete knowledge. 
 
A normal retail investor does understand that investment in mutual fund is prone to risks and losses. A better informed retail investor makes a more appropriate and learned decision. However a retail investor having no knowledge of the investment integrities solely depends upon the distributor to take decisions for him. 
 
The following precautions may be taken when dealing with a distributor’s FOS.
 
1) Securities and Exchange Board of India (SEBI) has mandated that every person in the business of selling mutual fund needs to have passed the National Institute of Securities Market (NISM) V-A certification. The certificate is valid for only three years. Institutional distributors circumvent this important criteria by stating that their FOS are only lead generators and the mutual fund is actually sold by a qualified person. In reality, it seldom happens. Simply ask and check the copy of a valid certificate.
 
2) FOS generally speaks only about the few mutual fund houses that he/his institution is associated with. There are always better options. It is always advisable to have a second opinion. You do it for medical diagnosis of reputed doctors then why not for investments. And never get carried away by terms like global trade war, and China factor. Compare the recommended funds with their peers on a few research websites. Use them as indicators but remember that these research websites only compare past performance and rate them. 
 
3) “HOOKS”is a term used to tie the customer to the distributor with numerous interlinked products and features which makes it difficult for him to exit even if he gets shoddy customer service or a better deal from competition. Beware of these hooks and always prefer easy exit alternatives.
 
4) FOS insist that you at least begin a systematic investment plan (SIP) with a small amount. Fund houses upfront the trail commission to distributors for SIPs hence the push. While SIPs build investment discipline, averages costs, it may be difficult (though you certainly can stop a SIP without any charges and the units can be withdrawn or moved to other scheme) to move easily into another scheme during the pendency of the SIP. Hence invest into a SIP only if you are sure of the MF scheme details. Prefer a 12 month SIP. You can always begin another SIP after reviewing of the progress. Please note that the taxation and exit loads are applicable as per the date of each installment of SIP and not from the date of first installment.
 
5) Always insist for the fact sheet of the mutual fund scheme. Please read the key facts very carefully and also review the official performance of the MF scheme. You would also like a quick scan of the portfolio to reveal apparent investments in bad companies or concentration into one particular sector. Remember that fact sheets are historical statements and you are investing into the future.
 
6) FOS staff are very active whenever a new fund offering (NFO) is launched. This is because the fund houses generally is liberal with the commissions, share prelaunch expenses for R&R events and upfront the trail commission. But retail investors need to remember that NFOs are chartering into unknown territories. There is no track record of the fund and/or the fund manager. There are numerous other factors that decide the performance of the NFO. Never be venture into NFOs unless you are very confident and have risk appetite.
 
7) All sectorial funds must be viewed with great caution. The equity market always moves in cycles. At some point some sectors perform very well while other lag behind. A case in point is the pharma sector fund. It required a Covid-19 for the pharma fund to show signs of performance.
 
8) Close ended funds also are very dicey. While AMCs state that close ended funds help the fund manager to take necessary decisions without the fear of redemption, it always leaves the investor with absolutely no liquidity till maturity. The net asset value (NAV) of HDFC Housing Opportunities Fund Series 1 1140D November 2017 (1) - Direct Plan as on 21 May 2020 is 6.57 i.e. an investment of Rs1 lakh is valued for about Rs65,700 after two and half years. This fund is from the stable of one of the largest fund houses of India HDFC MF and is managed by one of the most reputed senior fund manager Prashant Jain. 
 
9) FOS generally have young boys and girls, who are constantly moved from branch to another branch maybe due to performance or career growth. In almost all cases, the person who sold the MF to you is seldom available to you for your queries in future. Hence all possible clarifications, permutation and combinations be got in the first instance itself. 
 
10) Mis-selling is rampant in the industry. MFs and insurance products are sold as alternatives to secured fixed deposits (FDs) with higher rate of return. Signing of the forms with the terms and conditions give grounds to deniability to the distributor and the fund house. It may be interesting idea to record the entire discussion with the FOS after informing him of the recording. Don’t these institutions record your calls to their call center for training purpose!!!  If not anything else, it will at least install fear and the FOS will not make false statements.
 
Mutual funds are an essential segment of your investment basket and you should invest a portion of your savings in MFs. Selection of the right MF and regular monitoring of the fund is essential. The above 10 suggestions will help mitigate the losses. 
 
While initially assistance of distributor may be taken, it is always advisable to reduce the dependence on distributor over a period of time and move to direct schemes. The difference over a period of time is huge. Example: the difference between Rs1 lakh invested in regular plan and direct plan of Axis long term equity fund on 1 Jan 2013 is a huge amount of i.e. Rs22,288 (22.28%).
 
And remember distributors are paid trail commission from your investments irrespective of the funds’ performance. It is their job to visit you periodically and help you analyze the performance. Don’t let them go scot free and insist that they meet you periodically at least once a quarter to discuss your investment. 
 
And if they do not, just move to another distributor or redeem the funds or move it to direct scheme thereby depriving them of the trail commission. The time has come for the distributors to earn their trail commission and understand that there are no free lunches in this world. 
 
(Dr Sampath Iyer is a retired banker with over 30 years of experience. He retired as a Senior VP from a very large private sector bank. He is also a visiting faculty in a few colleges and business schools taking sessions on a range of topics including banking and personal investments.
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    COMMENTS

    jobby

    4 months ago

    Are SEBI officials regulating these entities required to take the NISM exams which they enforce on intermediatiaries?

    sampath_iyer

    4 months ago

    1. SEBI has restricted Upfront commission and direct sponsoring of R&R events . I stand corrected.
    2. There are individual distributors who continue to remain with the investor even after sale, periodically review their portfolio and continue to educate retail investors. They are definitely appreciated.

    vaibhavdhoka

    4 months ago

    Mutual fund Sahi hai,is failing this industry and big loosers are IFA,s.There many investors with me whose investment are decade old and moved to different places.Now in this period of lockdown which was never expected to long over two months.Now many investors woke up for there investment,but all are not tech savvy and so is case with old investors.And none of fund houses made arrangements for such investors, this again IFA,s is cursed as petty investors are denied their own money.SEBI should stop Mutual fund Sahi hai advertisement.Immediate process should be initiated for accepting hard copies with limited staff.

    kpushkar

    4 months ago

    Very interesting

    REPLY

    manju_sailvisl

    In Reply to kpushkar 4 months ago

    Very correct observations.
    However, when we have to build up corpus over a period of time,
    then we have to look towards MF investment with little risk appetising capacity.
    Because, investment in Bank FDs, Bonds etc. will not beat the inflation at time of retirement.
    ONLY GOOD FUND HOUSE WITH PROPER TRACK RECORDS ARE NEED OF THE HOUR.

    Bad Faith: Why Are Fund Houses Transferring Low-quality Debt from Credit Risk Schemes to Other Debt Schemes?
    Recently, credit risk schemes faced high redemptions and inflicted deep losses on investors, after Franklin India Mutual Fund wound up its six credit risk-based schemes, which had had over Rs26,000 crore in assets.
     
    This news affected credit risk schemes of other fund houses as investors assumed that even those might face the same fate. As a result, we saw massive outflow from the...
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  • ABSL Mutual Fund Suspends Fresh Subscription in Credit Risk, Medium Term Debt Schemes
    Aditya Birla Sun Life Mutual fund (ABSLMF) announced that it has temporarily stopped accepting fresh subscriptions and switch-in applications in two of its debt schemes. 
     
    The two schemes are: Aditya Birla Sun Life Medium Term Plan and Aditya Birla Sun Life Credit Risk. The suspension in fresh subscriptions will be effective 22 May, 2020.
     
    Further, the fund house also stated that it will not accept any fresh registrations under the systematic transactions, viz., systematic investment plans (SIPs), Century SIP (CSIP) and systematic transfer plan (STP).
     
    However, instalments falling due under SIP/CSIP/STP registered prior to the effective date will continue to be processed under the respective plans/options of the scheme, the fund house said in a circular to its unit-holders.
     
    Aditya Birla Sun Life Medium Term Plan is an open-ended medium-term debt scheme investing in debt papers with Macaulay duration between 3-4 years. The scheme has given poor returns due to multiple write-offs in the past one year. The one-year return of the scheme was -8.48%.
     
    Aditya Birla Sun Life Credit Risk is an open-ended debt scheme predominantly investing in AA and below rated corporate bonds. The scheme has delivered poor returns in the past six months due to write-offs of some of the debt papers in the portfolio. The one year return of the scheme has been 0.59% and three-year return was 4.22%.
     
    Understanding the Troubles Facing Certain Debt Schemes
     
    Credit risk debt schemes faced large-scale redemptions in April after Franklin Templeton India Mutual Fund (FTIMF) shut down six of its credit risk based debt schemes. 
     
    The shutdown was as an effect of the high exposure of the schemes to low credit quality, illiquid debt. The high credit risk profile of the schemes could not work in the current stressed economic scenario, where indebted companies are finding it difficult to meet loan obligations or raise funds.
     
    Due to this, investors in the credit risk schemes took the exit and moved to safer assets. Credit risk schemes witnessed a net outflow of Rs19,238.98 crore in the previous month. The total assets under management (AUM) in credit risk schemes at the beginning of April was Rs55,380 crore. This means 35% of the assets in the schemes took the exit.
     
    Other debt scheme categories, which had exposure to low-rated debt papers, were also affected and saw high redemptions. The next worst hit category was low duration funds and medium term funds with net outflow of Rs6,841 crore and Rs6,363 crore, respectively.
     
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    COMMENTS

    msivanand

    4 months ago

    The font used for stories is grey. Any reason for that beyond style? Can we have a choice of black font? Black font will be easier to read. Thank you.

    cjninan

    4 months ago

    As advocated by moneylife. Commission shoukd be based on earnings not aum. Amc and mf were supposed to be professionals. All are thieves. The best option for retail investors are

    - invest thru etf
    - invest in nps
    Balance in fd

    All crooks

    narayan.jeevan

    4 months ago

    I invested in ADITYA BIRLA SUN LIFE, pure value fund, 30 months back & redeemed now with capital loss of 50%. I wrote to mutual fund for not alerting when capital loss is 15 to 20% , to stop further loss to investors. Now they tell many stories. They lure investors for business/ incentives, hide risks in the scheme. They enjoy hefty salary and incentives at investors cost. No protection for retail investors from any agency including SEBI.

    REPLY

    soundararajanmk

    In Reply to narayan.jeevan 4 months ago

    Did you not receive annual statement of performance and NAVs from time to time? If they had not complied, you should have exited; even if the furnished data is reflected unsatisfactory performance. Whether there is profit or loss, the Fund Organziers will continue to debit the fund account with the establishment and other expenses. They will never be losers, even a rupee, under any circumstances. Govt. should close down all the Mutual Funds as the Stock Market is a Gambling Field and the Industrialists are extravagants/looters of public money, obtained from the PSBs. Govt. &SEBI appear to be party to such lootings, if not silent spectators.

    Udayan Dasgupta

    4 months ago

    I wonder who bears the cost? Hapless investors? Do we even know what the cost is?
    What is their brief? Does being "independent advisor" include acting against the interests of FT and their masters if need be, when it is in the interest of investors? Who oversees the independent advisor? Are any investor representatives involved? Is SEBI involved?
    Does FT and Kotak Bank even care to inform investors and take their approval, given the circumstances? Or is this another cosy fee arrangement between financial firms?

    Ramesh Popat

    4 months ago

    jaisi karni vaisi bharni! and to hide the wrongdoing, amcs are transferring bad
    securities in other schemes.! regulator either silent or can't stop it as its unavoidable
    evil! ML should expose such malpractices. (fertile ground!)

    REPLY

    narayan.jeevan

    In Reply to Ramesh Popat 4 months ago

    Every 10 years scams happen & retail investors lose. Harshad Mehta, Ketan parekh, Satyam to now YES BANK, DHFL, ILFS, JET AIRWAYS, KINGFISHER etc due to bad governance. Funds are systematically diverted over a period of time with the help of board, Banks, AUDITORS & many agencies. No protection for retail investors from any agency including SEBI when investors lose. Market is full of manipulation.

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