Home / Opinion / Banks selling own fund house schemes may not be good for you

When you buy a mutual fund through your bank, is the bank advising you or acting as a vendor? The answer to this question is important because the product you finally walk out with will either be a product that best suits your needs or a product that maximises the bank’s own interest. According to data compiled by Outlook Asia Capital Wealth Management India, which put together commission data from the Association of Mutual Funds in India (Amfi) (http://bit.ly/2a1hFAL ) and individual fund house commission numbers from their websites, banks are acting as advisers while wearing the hat of vendors. If you did not pay a fee for the advice in the bank and then walked to another desk to buy the product, the bank has mixed up the two roles. Anecdotal evidence shows that customers are influenced by what the bank manager has to say on product choice. It is unusual for a person to go to a bank asking for the product by name. It is usually a push from the bank that sees the fund build up in the account and then makes a sales pitch.

A look at the commission data is interesting: 98% of the 62.12 crore commission that State Bank of India Ltd (SBI) earned for financial year (FY) 2016 from selling mutual funds came from selling own fund house products of SBI Mutual Fund. About 66% of the 140.26 crore commission that Axis Bank Ltd earned came from selling its own fund house products. And 61% of the 169.72 crore commission that ICICI Bank Ltd earned came from selling its own fund house products. (An aside gripe to Amfi: your data is hard to find and is in a downloadable PDF format. This is not machine readable and therefore needs further work to make it open for analysis. It is not so difficult to fix this. Company data too is not machine readable.)

Why a bank selling its own fund a problem for you, the investor? Two issues. One, you are not getting the product that is good for you since you are being advised by entities that are regulated as distributors. Look at the good and steady funds in Mint50 and see the disparity in what was sold and what you needed. See the full list here: http://bit.ly/28OPj0o.

It’s like the chemist telling you the medical procedure you need and what set of medicines you need to take. The distributor of a financial product is not supposed to advise you—he is like a chemist and is simply vending the product. Vendors get incentives in the form of sales commissions. But we know that front loads encourage ‘churning’, or getting investors to rotate money between schemes, so that the seller can harvest the commissions again and again. To stop him from encouraging you to churn your investments, the sales commissions have moved from the front to the back of the product. Your 1,000 gets invested fully without any deductions towards sales costs. From their annual expenses (that sit in the expense ratio), mutual funds pay distributors a trail commission. But fund houses now use their own money to give an upfront commission. The advisers are to be compensated by you in the form of fees—just the way a doctor is (it is another matter that now many doctors are on commissions and ‘benefits’ from pharma companies).

Two, if a bank is selling its own fund house products, your portfolio will not get the diversification it needs. Remember the basic rules of safe investing—you must have different asset classes—equity, debt, gold and real estate.

Within equity, you must have a mix of large-cap, small-cap, multi-cap and sector funds. You must not hold too many schemes of one fund house, for that puts your money to a fund house risk—the risk of bad practices across the fund house affecting your money. The data shows that banks are not looking after your interest but maximising their own. Why are banks able to get away with it? Because there is still ambiguity in the mind of the capital market regulator on how high and hard the wall between sales and advice should be.

The Reserve Bank of India (RBI) has put down a charter of customer rights that has ‘suitability’ as a consumer right. This means that the product being sold must be what suits the investor’s age, stage, needs and goals. Selling your own funds does not tick the suitability box. RBI has asked banks to put in place a board-approved process to address issues of consumer protection. The deadline for this is end July. Waiting to see the sun rise from the West on 1 August 2016 as far as action from banks is concerned.

What can you do? Work with a financial planner or an established independent financial adviser (IFA). Be ready to pay fees. Remember that financial literacy does not mean that you know the insides of a mutual fund’s structure. It means that you are able to ask reasonable questions on costs, benefits, lock-ins, exit costs, taxation and portfolio construction.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, member of the Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at monika.h@livemint.com.

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