Don't fall prey to the greed of your Distributor/ Broker

SEBI has recently announced a few important changes in the way Mutual Funds will be sold. The first change was the removal of entry load on selling Mutual funds, and the second important change has been allowing the buying/selling of Mutual Funds through stock exchanges (which is applicable to those investors who already have a DEMAT account). These changes have been initiated by SEBI for the benefit of the investor community, and are likely to have far reaching consequences on the way Mutual funds will be bought/ sold in the future.

The first step, which is an attempt to reign in the commissions of fund distributors, was expected to have a negative impact on the Mutual Fund NFO's in the short term. But on the contrary, new fund offers opened recently have had a relatively better run as far as subscriptions are concerned. This is because most distributors are advising their clients to offload their holdings in old schemes where they have made profits, and enter the new schemes. The catch is that even after the abolition of the 2.25% entry load which was borne by the investor, most fund houses are offering a higher commision, which could be as high as 4-5% for selling NFO's. On the contrary, the distributors are shying away from selling existing schemes as the commission earned on them is low. Does this make sense for the investor? In one way it temtamounts to mis-selling, as the investor is denied the benefit of investing in an established scheme, where the track record of the Fund House/ Fund Manager is known. From a Financial Planner's point of view, investment in an old scheme with an excellent track record is always preferable over a new and untested scheme.

With effect from 30th november 2009 it has become possible to invest in Mutual funds through a stock broker using NSE platform. This new route for MF investment is hassle free and reduces the cost of transaction. However, most of the brokers may not be in a position to give the best Mutual Fund advice, again due to his greed for earning more commission/ brokerage. There is the lurking danger of Mutual Funds being treated as trading stock, instead of a vehicle for long term investment.

There is an imperative need for independent Financial Advisors to fill in the gap and guide the investor on his investments based on his need analysis, foresaking the lure of selling a product that is not in line with the investor's aspirations for the sake of earning a slightly higher commission. They must appreciate the fact that genuinine investors value good advice, which can more than make up for the loss of commission in the long term. Investors need to be beware of the temptation to treat Mutual Funds as trading instruments, because by doing so they will be falling prey to the greed of others, and will be losing out on an opportunity to create long term wealth.