Mutual Fund business is highly regulated by SEBI. Each piece of information about every scheme is transparent, and available publicly for investors to make an informed decision.
Still, investors can lose out due to following practises.
- Mis-selling on basis of recent past performance: While investing, investors usually invest simply in schemes which have performed best in recent past expecting the schemes to mimic the same performance in future. While past performance is a factor to judge suitability of the scheme, it’s one of the many factors. I have detailed out how to find right scheme for you in this answer. Mutual fund distributors also push the schemes on basis of recent past performance, since this is what convinces people and makes distributor’s job easier.
- Selling schemes with higher distributor commissions : There are more than 40 different mutual fund houses in India with 1000’s of schemes out there in the market. Whenever a mutual fund distributor sells a regular planof a scheme to you, distributor gets a commission from mutual fund company. This commission varies from fund house to fund house as well from scheme to scheme. So, mutual fund distributors are more likely to sell you schemes which gives them more commission.
How can you save yourself from being misled by such practises?
Ever heard, “Mutual Funds are subject to market risks, read the offer document carefully before investing” ?
What to look for in a scheme?
If you are investing without any expert consultation, you should at least read the offer document very carefully. It details out each and everything about the scheme like objective of the scheme - whether it is meant to give you returns in short term, medium term or long term, kind of assets in which the scheme will invest, kind of risk which the scheme possesses, fund manager of the scheme etc. etc.
Along with the offer document, read the recent monthly factsheets of the scheme to see how it has been doing recently in terms of returns, portfolio, fund manager, expense ratio etc etc.
How to invest? Regular vs Direct?
Invest in direct plans to save the commission paid to distributors. Typical mutual fund distributors made sense back in the days when there was too much paper work involved in doing the transactions. They used to add a great value in doing the paper work of investing in mutual funds. Now that pretty much everything is paperless, that role of distributors is no more relevant.
So, distributors who do not add any value apart from facilitating transactions should be avoided. Best way is to consult a fee based SEBI Registered Investment Adviser(Disclaimer: I am one such adviser), who are not only competent to suggest you the best schemes for you based on your risk and financial goals, but also do not make commissions on selling your mutual fund schemes. Such fee based advisers will recommend you direct mutual fund plans only and charge an upfront fees for unbiased advisory and financial planning.