You can now decide the fee of your adviser, but do you know how much is enough? There are three levels of service available, pay only for what you get.
It’s confusing time for mutual fund (MF) investors. The way to buy and sell funds changed drastically in the last half of 2009 and the industry as well as the investors are still trying to make sense of how to deal with a no-load world.
On 1 August, the Securities and Exchange Board of India (Sebi) became the first capital market regulator in the world to make mutual funds a no-load product. Mutual funds in India will now invest the full Rs100 that you put in instead of Rs97.75 that they earlier did.
You will now have to compensate your agent for the service you think he provides. You get transparency because you can evaluate service and pay accordingly. But here’s where you run into the first roadblock: how do you know what to pay? But before we get to the money bit, a look at the various levels of service in the market.
Who does what?
Essentially, there are three levels of service in the market.
At the base level, you get an agent who can be likened to a chemist. A chemist is a person who does not, and should not, have a view on the medicine you buy. His job is to follow the prescription written by the doctor or to sell you the non-prescription medicine you have chosen yourself. This chemist is the agent or the seller of a mutual fund. He is the foot soldier who simply gives you a form, gets a signature and completes the transaction. He used to earn commissions, but will now be compensated by you directly.At the next level is an adviser. His job is to help you choose a mutual fund from over 1,000 schemes that are on offer in India. His expertise is to match funds that have consistent good performance with your needs and then manage your investments over time. What you would pay this person is higher than what you would pay the agent.
Higher in the pecking order than an adviser is a financial planner. He does not just advise you on investments, but also helps you zero in on the best loan deals, restructures and keeps in place your borrowings, plans your finances, does your risk management for you, helps you lower your tax outgo and even follows up the entire process of estate planning to ensure a smooth transfer of all your assets to your legal heirs after your death.
A financial planner is a qualified guide having a universally accepted certification. Currently, in India, the Certified Financial Planner (CFP) is the most credible stamp that qualifies a person to manage your financial life.
What to pay?
The mutual fund industry is in a flux given the slew of changes announced by Sebi in 2009. Intermediaries are confused as to what to charge and investors are unsure of how to value services.
Since Sebi has allowed mutual funds to list on stock exchanges, there is a basic level of charges that we can now benchmark ourselves to. A retail investor needs to pay 20 to 40 basis points (a basis point is one-hundredth of a percentage point) or around 20 to 40 paise for every Rs100 to buy shares on an exchange. The same is true when selling shares.
Agent: Your MF agent may charge a bit more because, unlike shares, transactions where you pick up your phone and call up to place orders, your MF agent would still need to visit your home or office to pick up the forms and deliver them to the fund houses. It’s a courier service for which he’ll charge marginally more.
However, with little or no advice on offer, there is no reason why agents should charge you more than 50 basis points on the investment, specially because there is a trail commission on the money that stays invested. That is what you should pay any entity (individual, bank, distribution house) who simply vends the product you have chosen to you.
Adviser: The adviser helps you choose, maintain and redeem your funds. He has no view on the rest of your finances. Many such advisers these days charge no fees from you; they earn from the trail commission (typically around 40 to 50 basis points) MFs pay them for as long as you stay invested. Some advisers do charge around 0.50-1% of your transaction amount as an upfront fee.
Planner: The financial planner is the qualified doctor who runs his dispensary as well as his own chemist shop. So, you need to pay for all of this. Broadly speaking, CFPs today in India charge you anything between Rs5,000 and Rs20,000 for the first financial plan. Subsequently, the charges can go up to Rs15,000-30,000, or even upwards every year. This, typically, includes one or few reviews of your financial planning every year to ensure you’re on track. Note that these are ballpark figures and financial planners charge you depending on how much effort they need to put in to set your house in order.
How to choose
There isn’t one way that works the best. What seems to work is to look at what other people are doing.
Rajesh Krishnamoorthy, managing director, iFast Financial India Pvt. Ltd, an online portal that offers MF schemes, feels it’s also a good idea to ask around and check out what your friends are up to. He says: “It’s a good idea to ask them about their financial planner or distributor and their experiences. It’s a great way to get to know the adviser’s track record if your friends or close circle can corroborate.”
Agrees Lovaii Navlakhi, CEO, International Money Matters, a Bangalore-based financial advisory company: “Read the newspapers and look out for any financial planners. If what they’re saying makes sense to you, get in touch with them.”
But, remember to ask some basic questions even if the intermediary comes with a reference. You should know what is his qualification, how long has he been in business and how many clients he has. How much time he spends with you and what sort of questions he asks is also important.
For instance, if he is trying to sell you just any product to hit and run, he is unlikely to be very concerned about your needs and goals. Try asking questions in areas of help you’re looking for. “If you are looking for taxation advice, try asking him tax-related questions to check his knowledge,” adds Navlakhi.
One red flag that should warn you of a hit-and-run salesperson is: “How much do you have to invest?” It would be much better, if you hear: “What do you want your money to do?”
Posts
No comments:
Post a Comment