Khota Paisa

Why Mutual Funds Are Not For Everyone?

Posted in General by khotapaisa on August 22, 2009

Mutual funds have come to form the core of any long term portfolio. Owing to the apparent simplicity, fund are now increasingly managing more of household savings. Even though investing in funds may seem to be very simple exercise (more so given the option of SIP route), there are some big practical issues with mutual funds. I would try to list a few.
1. Infrastructure – Unlike tier I & tier II cities, investor in smaller cities & towns don’t have the easy access to mutual fund agents. This situation is unlike the insurance space where agents are available in the neighborhood. Online trading is much less preferred because of reasons like awareness, computer-literacy, slow & unreliable net access.
2. Agent Reliability – Anyone who has regularly transacted in mutual funds will tell you that agents are not permanent. If you are looking over a few years, you might need to change your agent for various reason (bad service, agent stops offering service, relocates etc). In fact, in the last 3 years, I have changed my agent twice.
3. Continuous Paperwork – Even with SIP option, paper work is unavoidable when it comes to investing in funds. It is ok if you have to go through paper work to start your investment. But you need to sign forms every time you want to switch, sell, change SIP. And all this paper work becomes practically unbearable if you have to call your agent more than once to get it done. Consider it against the fact that all you need to do to sell/buy share is just a call to your broker.
4. Need For Monitoring – Investing in funds is not a one time process. The investor needs to actively monitor the investments. Though once-a-year assessment of funds is sufficient, a common investor is bound to do it more often. Assuming that every other assessment will result in transactions (buying, selling or switching), it will amount to a huge exercise over an year. The need to monitor fund investments also brings forth the issue of knowledge. A common investor is not qualified to assess or select funds. Most of the agent are not investment advisor but mere selling agents. And this inherently exposes the investor to higher risks like unsuitable fund selection, portfolio churning, unbalanced portfolio etc.
Given the issues, lets us try to consider ULIP. Before you react, let me state that I am no ULIP fan myself. Clearly ULIP doesn’t have the issues which confront mutual funds. They might give lower return on investment in comparison to mutual funds but they don’t need active monitoring. Infact, ULIP is a good alternative to MF for those who can’t invest in funds over long term for the above mentioned reasons. Remember that unlike aware & passionate investors, a common investor in a small city may not need/want to achieve high investment efficiency.
All said, imagine how good it would be if you just had to call you advisor to buy/sell/switch funds.


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