Last Updated on August 30, 2021 at 3:44 pm
Since the post on, ‘What you need to know before hiring a financial advisor’, I have been bombarded by two kinds of emails/comments.
- Requests for sharing the list of fee-only financial planners, which is a pleasant and welcome surprise and
- About how mutual fund distribution is not necessarily a bad thing and how I just don’t get it! ‘It’ being the ‘business’ of financial advisory.
In this post, I would like to clear the air a bit before taking on the titular question!
Update: While the rest of this post is still relevant, it is important for readers to recognise that SEBI has mandated that distributors should only provide incidental advice about the products they sell. This means, they cannot offer goal-based investing or financial planning advice.
SEBI has also cautioned that investors should only deal with SEBI registered investment advisers. So …!
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
I have nothing against mutual fund distribution. I just cannot stomach it when a financial planner does it. Hey, I am not alone. SEBI says so too!
Although I am a direct mutual fund investor and strongly encourage such an investment mode it is not because I dislike distributors or that they are of no use to investors.
I believe the direct route is the best way an investor can take conscious control of his/her finances. The extra returns are just the cherries on top an already tasty cake!
Mutual fund distributors are entrepreneurs. All entrepreneurs put their interests first. They sell what sells. They say what it takes to sell. Nothing wrong from their point of view.
From the customer’s point of view, their actions can be far from optimal. Please do not expect them, their friends in the industry and/or a typical personal finance blogger to bell the cat. That would be beyond naïve. (Do not be surprised if your favourite blogger turned out to be a distributor!)
Ask a distributor a dumb question and you are likely to get a commission-driven answer!
So there are things that one should expect from a distributor and there are things that one should not. There are do’s and there are don’ts.
If I think, or if a professional tells me that hiring a professional means, I can forget about homework, one of us is an idiot and it is not the professional!
So one needs to double-check every advice (medical/financial …). Whether it is prudent to invest time on constant double-checking or on DIY is a question, that each of us will need to answer on a case-to-case basis!
Before we begin, it is important to recognise that every advice that a distributor offers have commissions linked to it. A new purchase, stopping a SIP, redemptions etc. This is not necessarily a bad thing, but is important to keep in mind.
What to expect from a mutual fund distributor?
- I want a distributor to select good funds suitable for my investment purpose with a justification behind the fund selection.
- If my funds underperform, I need advice. Solid quantitative advice.
- Reasonable help with capital gains and taxation.
That is about as far as I can think! Sounds good? Sounds fair?
What NOT to expect from a mutual fund distributor?
In one phrase: financial planning advice!
- Do not expect distributors to select funds that match with the risk profile of your financial goal. In fact, even financial planners fail to recognise this sometimes and use risk profilers to gauge risk appetite!
If you do not understand why the risk profile of your goal is more important than your risk appetite, no one can help you! Remember the adage, garbage in, garbage out!
- Never ask a distributor, which is the best fund to invest in? This is a dumb question and you are likely to receive a commission-driven answer. Always ask for a short-list of funds suitable for your purpose. Take the list, review it yourself before choosing. An elementary understanding of risk and return is necessary .. eventually if not immediately!
Remember: Best does not mean high returns! Best means consistent good returns with low downside risk.
- Never ask a distributor, how much should I invest? This is a dumber question. Have a goal in mind, determine how to invest for the goal and you have the answer. Contact a distributor for mutual fund expertise and not for financial planning!
Don’ts
- Never encourage distributors to talk to you about NFOs! NFOs (open or closed-ended) are driven by commissions.
If gold does well, AMCs offer ETFs/FoFs and urge distributors to shove them down investors throats! Now that we have a market rally, everyone will encourage equity investing! Now ‘long term’ will again become 5 years! See any new gold funds these days?!
- Don’t have cash unattached to any financial goal lying around. Tag a goal to the amount, at once. Understand which fund category is suitable for you and then approach the distributor.
- There is more to mutual fund investing than returns and saving tax! If you think only about returns and tax, you will find yourself surrounded by clutter. Clutter that is commission-sensitive and time-sensitive (ELSS, double-indexation FMPs)!
- Don’t follow any advice blindly. If the distributor says your SIPs can continue ask for logical reasons with proof. Remember a distributor can lose trail commission and possibly part of upfront commissions if you redeem. So he/she may not have your interests at the forefront.
How to choose a fund distributor?
- I have interacted with a few pure distributors for a couple of years now. My experience is that those with a history of stock picking understand market volatility better. Those who deal with bonds and are conversant with bond returns and risk, understand debt funds better.
- Choosing an online distributor like FundsIndia, ScripBox, RupeeVest, ICICdirect, etc. seems like a better option to me. Along with convenience (assuming that is a key requirement), you can invest calmly with no pressure and take an informed decision.
- Never buy mutual funds from a bank! Need I explain why?! Unfortunately, there is more bad news on this front. Sebi wants AMCs to push distribution via PSU banks!
An interesting read: The inside story of mutual fund distributors
Sounds like a lot of work, does it not! It sure does. Whose money is it anyway?
Why not invest via the financial planner? Is it not more convenient?
Conflict of interest is often camouflaged as convenience. Which is why it is now illegal for planners to earn distribution commissions. Of course many of them have found ways to shift the earnings to a family member. If you are not repulsed by this, what do I care?!
Why not invest a little more time and DIY all the way? I am with you there … now that I have cleared the air that I am not against distributors!
Bottom Line: You will need to be in control and drive the conversation. You have a need and seek a suitable product. You know the kind of product to choose but need help in selecting one. A distributor helps with this. If you meet a distributor without a plan, he/she will offer you one –quite possibly better suited for him/her!
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)