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Paying a fee for Mutual Funds

Paying a fee for Mutual Funds
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First Published: Thu, Jul 30 2009. 04 56 PM IST
Updated: Thu, Jul 30 2009. 04 56 PM IST
Winds of change are blowing at hurricane speed in the Mutual Fund industry.
From Aug 1, 2009, investors would not have to pay any entry load in any Mutual Fund Scheme. SEBI has recommended that instead, they - the investor - would have to compensate their financial advisor a suitable amount for advisory services. This means that for every Rs. 1000 given to a MF scheme, the entire Rs. 1000 is available for investment.
(Do a simple exercise, look at all your investments, Mutual funds, Insurance, Debentures etc, and see which one has snipped the biggest hole as initial charges. Some may have collected Rs. 1000, but invested just Rs. 600).
This is a very investor friendly measure, and ensures the highest level of investment efficiency – unmatched by most products. For this single reason, Mutual Funds rank as one of the greatest financial products in India today.
But how does the advisor get compensated ?
In two ways. He continues to get a commission from the MF house (or AMC as they are called) and more importantly, he is expected to be reasonably remunerated by you, the investor. The commission stands reduced after abolishing loads and thus investor fees are expected to make good the deficit.
Why should you pay ?
There Is No Such Thing As a Free Lunch. Please remember this. Advisors - Independent, Banker or Broker - provide a service, much like a Doctor, Chartered Accountant or a Tutor. Your fee will determine the sustainability of your relationship with a good advisor. Advisors on their part also know that there is an obligation to provide the finest advice and most responsive service to a good fee paying investor.
My recommendation
Pay fees. Be fair. Be generous. Treat your advisor as you would your cardiac surgeon. With utmost respect. Nurture the relationship. You will benefit. But settle for nothing less than 100% Integrity and Transparency. 99% honesty will just not do. Make that clear. If you don’t do it on Aug 1, 2009, chances are that you will not do it on Aug 1, 2019 either. In my experience, the best advisors (as measured by helping their clients achieve their objectives) are those that have Integrity, Maturity and Customer Orientation. Not necessarily the ones with smarter jargon, slicker appearance and complex products. In short, those that have YOUR target in mind, not THEIRS. Be careful, very careful of those that justify financial instruments that embed a high front-end fee. Always, insist on disclosure of ALL charges. If you are convinced about product suitability despite high charges, go ahead. It’s your money. Not mine.
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First Published: Thu, Jul 30 2009. 04 56 PM IST