Saurabh used to invest in equity mutual funds through relationship managers employed in his local bank till few months back. He deemed this process of investing in mutual fund as tedious, given that he had to schedule regular meetings with his RM for filling up application forms and signing cheques, and wait for couple of days for redeeming the units. Moreover, he was not particularly fond of the investment advice as his RM mostly pushed him towards buying NFOs.
His interest in capital markets encouraged him to take a more proactive approach in investment decision making process. Today, he is a member of an increasing number of Do-it-Yourself (DIY) investors, who prefer to build and manage their own mutual fund portfolios through independent online portals. Just like Saurabh, you could also benefit from managing investments on your own. Here’s why you should DIY your own mutual fund investments:
1. Units at same day’s price: The online mutual fund portals have tie ups with most of the banks, which allow you to make almost real time purchases and withdrawals of units. So, irrespective of your location in India, you can get the allotment of fresh units within the same day (provided you complete the transaction within the cut-off time). This feature will especially work in your favour in case of market crashes as your units will be allotted in the same day.
2. Convenience: DIY investing through online portals allows you to avoid the hassle of setting up appointments with your advisor, filling up paper forms and clearance of cheques, etc. Online portals also allow you 24-hour access to transact and monitor your entire portfolio with a click of mouse. Most of them are also available on mobile platforms. These platforms also provide quality market research to help you make sound investment decisions.
3. Automated investment advice: Most financial portals today offer automated investment advisory without any human intervention. These automated services use highly advanced computer programs armed with algorithms andanalytics to assess your risk profile and suggest asset allocation accordingly. Thus, the use of automation rules out the possibility of human bias and mis-selling commonly found in the advisory model.
4. No scope of mis-selling by agents: A portfolio suggested by your advisor will contain the funds that your advisor feels good about. In the process, your investments might get exposed to the bias of your advisor, compromising your own unique requirements and goals. In worse scenario, your advisor may recommend you funds based on his or his employer’s compensation requirements and not in your best interest, as evident in case of New Fund Offers (NFOs).
Sometimes, the advisors also resort to unnecessary churning of your portfolio in order to earn more upfront commissions, thereby, hurting the objective of achieving long-term growth. The higher upfront commissions (commissions paid to advisors on fresh investments) paid to advisors as against trail commissions (commissions paid having clients staying invested in the scheme) has led to a serious conflict of interest in the mutual fund industry.
5. Access to impartial information: One of the main criticism against DIY investing in mutual funds is that investment decision making is not an easy task as you have to take into account various factors such as your financial goals, market conditions, macroeconomic factors and the reason for performance (or underperformance) of mutual funds. As a result, common investors had to depend on relationship managers or brokers who have their own biases toward market events.
However, the proliferation of internet has ensured that retail investors have access to the same information that professionals have. Today, you can easily access earnings reports, market quotes, stocks charts and even educational articles from the world’s top investors.This improved access to market information allows you to take independent decision without any biases of market intermediaries. Apart from these, you can also refer online financial calculators to know how to achieve your various financial goals. A sustained effort to learn from the available resources along with the willingness to take chances will refine your investment skills over the time.
6. Zero cost of investment: Although offline fund distributors don’t charge any AMC to their clients, the online platforms of some stock brokers and commercial banks charge their customers in the form of annual management charges (AMC) or professional/transaction fees on transactions. However, most DIY platforms are cost free as they do not charge AMC or transaction/ professional charges on the transactions. Some online portals have also started offering direct plans, which come with lower expense ratio than regular mutual fund plans.
DIY investing in mutual funds is not as complex as it is made out to be. Unlike stock selection, the main criteria of choosing funds are their past performance and how their investment objective suits your personal goals. The online platforms are really easy to use and do not take more than a few minutes to complete a transaction. So, if you have an enthusiasm for lifelong learning and possess the traits of independent thinking along with sound analytical capabilities, patience and discipline, you are perfectly fit for DIY investments.
By Manish Kothari, Director, PaisaBazaar.com
(Published in businesstoday on June 1, 2016)
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