For Unhappy Investors

I come across a lot of my friends who are unhappy with their investment in mutual funds. Most of them have invested in mutual funds three years back and at present, they are sitting on unrealised losses on their portfolios. When they purchased these funds three years back, they had witnessed a sharp bull run in their NAV’s. They expected the bull market performance to carry on. Now they are ruining the fact that they did not book profits at that time. My friends should have known the risks associated with investing in mutual funds. You can even loose your capital invested. It is of utmost importance for investors to know about the risks associated with mutual fund investing. They were generally mis-informed by a few agents and distributors who only have the knowledge of filling up forms and submitting it to the respective companies and earn good commissions.

Markets outlook: It is for sure that even the best mutual funds have lost all their gains of the past three years but a few good mutual funds that are five years old are still in the green. Government is trying its level best to infuse capital into the markets to spur growth. Foreign investors are on the lookout for an opportunity to enter the market through FDI route. Even foreign institutional investors who have liquidated their portfolios last year will return back to emerging markets like India. Reforms and disinvestment are on the cards. India growth story is robust in the years to come.

Advice for investors: If you are in urgent need of cash, then only think of liquidating your investments at losses or else stay invested in the loss making mutual funds. You can switch between funds if your fund has performed worse then their category on benchmark returns. Moreover, try and invest for long term capital gains in the markets. You have quite a few good mutual funds that have revalued up to 60% from their highs and they will surely perform when the markets start performing. You should look at investing in small chunks at every market correction. Don’t stop your SIP investments as they purchase more units when the markets correct.

Remember Warren Buffet’s advice. "Be greedy when others are fearful and be fearful when others are greedy". Follow this principle and you will benefit the most from markets.

Mutual Fund Entry Load Controversy

Till date retail investors are charged an entry load of 2.25% on their investments in equity mutual funds. In case the investors fill their forms and submit them directly to the fund house there is no entry load applicable to them as it is assumed that they do not require any advice from agents/ distributor’s. An entry load is a charge levied by the fund house on investors which is utilised for payment of agent/ distributor's commission.



There exist different regulators for different investment options available in the market like RBI, SEBI, IRDA, PFRDA etc. Here SEBI has tried to bring transparency in payment of commission to mutual fund distributors. It has decided that there will be no entry load for existing or new mutual fund schemes.

There would be a fixed fee that shall be paid by the investor to the distributor directly. Moreover, the distributors shall disclose the commission, trail or otherwise, received by them.

Now what makes this judgement debatable:-

1. For people who do not require any advice for mutual fund investment’s, they already have the option and would continue to invest directly as per the direct investment rule earlier stated by SEBI and won’t attract any load on their investments.

2. If SEBI has regulated no load for equity schemes, its high time IRDA should also look into ULIP’s charging 3 to 50% charges in the first year. The charges are much more then mutual funds even in the following years till maturity.

3. This move will indirectly pinch the distributors to sell more ULIP’s rather than earning petty income from advising mutual funds. This will not be in investor’s interest and will affect the growth of the mutual fund industry.

4. This move will also give rise to a few already established distribution companies in the market who can afford low commissions to work on achieving higher targets by completing more and more applications of a similar fund or company. They won’t consider investors interest but will consider which fund house provides them higher miscellaneous benefits for advising their funds.

5. It is also possible that distributors start charging commissions in cash and don’t disclose it as their fees, in consultation with the investors and also they ignore showing it as their income while filling returns. The income tax authorities will earn less as currently the commissions earned by distributors are paid after deduction of tax.

6. If direct investments for mutual funds are possible then even insurance products should be sold without any charges. If you have the requisite knowledge about insurance policies available in the market and don’t require any advice, why should you pay high charges on insurance products?

7. Let’s consider similar case for a stock broker. If you do not take advice from a stock broker about the shares you purchase or sell then why should I pay brokerage to them. Capital markets are also regulated by SEBI for instance.

8. If an investor wants to start a Systematic Investment Plan for 5 years and each month a certain amount gets debited directly from his bank account. In such a case you are expecting a distributor to go door to door and collect the requisite fees each month as an LIC agent used to go door to door collecting premiums decades ago. Does this sound logical in an era where everything is automated and does this assure that distributors will be paid monthly fees?

This judgement is a win-win situation for the investors to a certain extent but I regret that they would be mis-sold policies that are not in line to achieving their financial goals. My sincere advice for the investors is ‘BE CAUTIOUS’ in the days to come.

About Mutual Fund - Basic

What is mutual fund?

A mutual fund is a company which allows a group of individual to pool their money for some objective. The objective is mainly to invest in a stock, bonds and other securities. Each investor gets their part in the form of unit in that mutual fund. In simple terms Mutual fund companies take fund from many investors and invest it in the securities on behalf of them. They transfer the profits made from the investments to the investors. They charge fees for their services.

Why to invest in the mutual fund? (Advantages) –

1) The main advantage of investing in mutual fund is professional service. Many individuals do not have necessary knowledge to invest in the market or they don’t have time to analyze the market situation. Mutual fund companies hire qualified professionals to manage the fund. They have required knowledge and the skill.

2) Mutual fund buys and sells securities in bulk which saves the transaction cost. IF individual do lots of trade then all his profit will go in paying commissions.

3) Mutual funds invest in many securities which diversify the risk. For exam. Some Mutual fund maintains the balance between Equity and Fixed Income. So even if equity market is not doing well then they at least have income from fixed income securities.

4) Mutual fund is subject to government regulation which protects the safeguard of the investors.

5) Liquidity is another benefit of mutual fund. You can easily redeem the same.

6) Some mutual funds have tax benefits under sec 80cc.


Why to think before investing in Mutual fund? (Disadvantages)–

1) Mutual funds are costly affair. Fund management fees may be unreasonable for the services rendered. There are many costs involved in it that some investors don’t even understand what they are charged for. One should always find the cost before investing in it.

2) The main feature of mutual fund is diversification. But again due to excessive diversification investors don’t earn good amount of profit. Its like low risk low return.

3) Though some mutual funds offer tax benefits, when fund manager sells the securities they have to pay the capital gain tax. Individual can avoid the capital gain tax liability.

4) Share in profit, share in loss. Mutual fund doesn’t come with a guarantee of a return. You loose money in mutual fund also.