While there are many fintech platforms coming up which offer direct plans, there are a large portion of investors who mostly purchase mutual funds from distributors. The distributor gets compensated in the form of commissions. Nothing wrong in it though. The problem arises when the distributor recommends funds which align with his own interest rather than the investor’s. Here is how you as an investor should be aware whether your distributor is offering conflict-free advice:
- Sells you too many funds: I have seen many client portfolios messed up with 35-40 different mutual funds with different folios which are difficult to track & manage. More number of funds in your portfolio does not enhance your returns. (read here: https://goalbridge.in/how-many-mutual-funds-should-you-have-in-your-portfolio/) If your distributor tries to sell you too many funds from different categories without understanding your requirement and risk appetite, you need to become cautious.
- Pushes to buy NFOs: New fund offers (NFO) pay higher commissions than existing funds. While I am not suggesting that all NFOs are bad, mostly all of them are repetitive with similar investment objectives. If your distributor every now and then calls you to invest in NFOs in the market, it is time to smell the coffee.
- Frequent churn: There is a one-time upfront commission paid to distributors for selling mutual funds. As long as you stay invested, he also earns a regular trail commission which is lower than the upfront commission. Distributors in a bid to earn high upfront commissions frequently churn portfolios. This is totally against promoting long-term investing in equities. It is a red flag, if you observe frequent churning in your portfolio.
- Recommends lesser-known small fund houses: Higher the fund size, lower the fees and hence lower the commissions and vice versa. In the beginning years, the smaller fund houses in order to garner assets pay very high commissions. Although not all small sized funds are bad, but you need to introspect if your distributor is recommending mostly such lesser known and smaller size funds with no history & track record.
- Misleading information: If your distributor has given misleading information on how your fund works and makes money for you, then you could be in a for rude surprise. For e.g., dividend yield funds are sold as products which guarantee a regular dividend income every month. The reality is that dividend yield funds invests in high dividend yielding companies but that should not be construed as regular income payout & guaranteed returns.
I am hopeful that through increased financial awareness, investors will be able to differentiate between the distributors who would work in their client’s interest and the ones who would offer conflicting advice. Hope this checklist helps you to weed out such unscrupulous agents.