In India, to start practicing as a financial distributor is not that difficult. The entry levels are easy. Lot many incompetent so-called 'advisors' do this as business and not as a profession.
Also investors in India look at financial instruments as products. They try to get rebates out of the distributor's commission that he receives. Investors feel happy if they succeed in getting good rebates but they tend to miss some untold facts.
Distributors get variable commissions from various mutual funds and sometimes-variable commissions on different equity funds of same fund house. The modus operandi is simple -- Inferior funds shell out more and good funds shell out much lesser commissions. When an investor comes to a distributor for higher rebates, the distributor smartly advices him an inferior fund where he gets more commission and passes out maybe a part of it to the investor.
The distributor ends up earning more and also the investor is happy. Win-Win situation, isn't it? But if the investor checks the performance of this fund after 6 months or 1 year, he would be surprised to see that there are many funds which delivered as much as twice the returns during that period (in last 12 months returns generated by over 100 equity funds vary from 20-100%).
So, has the wise investor who got rebate has actually been wise?
'Price is what you pay, value is what you get'
Investors should realise that distributors have to pay 12.25% service tax, 33% income tax (including surcharge and education cess) and above that, there are huge office expenses including staff salaries, etc. and if they are asked to give rebates too, be sure you got advice of an inferior quality scheme which will under perform vis-à-vis many other funds available.
So check your Equity MF Portfolio:
Check whether your Equity MF Investments feature at least in the first 50% out of the overall available funds. If they are featuring in the first 25% category, then you are getting the best available advice.
The comparison must be done individually for each investment (from the date of investment up to current date), and if they don't feature in first 25% or even in the first 50%, please think:
- On what basis had you selected that fund expecting it to be the best?
- Had your advisor recommended that to you?
- Ask that advisor to explain the reason of underperformance.
- Also realize, is your advisor unnecessarily churning your portfolio too fast?
That's the most common practice by most of the Indian and foreign bank relationship managers & financial advisors too.
Invest through a professional advisor who focuses on generating best returns consistently for you and who believes in educating investors about markets, right fund selection, right & wrong practices prevailing etc.
A wise investor is one who is interested in best quality advice for generating consistent top quartile returns. And a wise advisor is one who believes in long-term relationship with his investors keeping their best interest at the foremost always. That's a Win-Win situation.
The author is, Jaydeep Kashikar, Director, BrainPoint Investment Centre. For all your investment queries / requirements he can be reached at jaydeep@brainpointinv.com
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