You have decided to invest your money and want to get maximum returns on your investments, but with your busy schedule, you might not have the time and information to decide what or when to buy. Here comes the benefit of Mutual Funds. In this article, we take an in-depth look at how you can invest in different mutual fund schemes in India
Regulatory requirements for investing in Mutual funds
The regulatory requirements for investing in mutual funds are relatively simple. All you need to do is complete something called the KYC (Know your Customer) process and then you are set to buy mutual funds. Unlike in stock trading, you are not required to open a Demat Account.
KYC requirements are quite simple to meet. All you need to do is submit a proof of identity (PAN card is preferred) and a proof of address. In addition, the route through which you chose to invest (more on this later) will conduct an IPV (in-person verification) and you are done.
These days e-KYC facilities are available through most major mutual fund houses and online portals where you can get KYC done from your home. With new developments such as Aadhar based KYC, online KYC should pretty much become the norm soon.
Commissions or no Commissions – you decide
When investing in mutual funds, it is very important to note that the route of your investment determines whether or not you end up paying commissions. Since 2013, SEBI has mandated that all mutual funds should have two plans. First are the regular plans which have always been there. The plans have in-built commissions for the distributor who is selling you the plan and as a result, give lower returns. Second are the direct plans which were introduced in 2013. These are 0-commission plans.
Different avenues for buying mutual funds and their pros and cons
1. Directly from the AMC (Asset management company) website/ their RTA agents/MFU: Investors can directly purchase mutual funds from the website of the mutual fund company or AMC to which that fund belongs. Mutual funds also have RTA agents who handle their back-end processing. CAM and Karvy are the two main RTA agents who handle the processing work for about 15-20 AMCS each. Both of them offer portals for customers to buy funds of AMCs handled by them. Finally, MFU is a portal has been created through a collaboration of 25 AMCs. It is mainly a platform for distributors but retail investors can also purchase funds from any of these AMCs.
– All of these ways offer a way to buy direct funds
– Access to a limited number of funds (esp. on AMC website) and hence you need to have multiple accounts at different placed
– You need to do research elsewhere and know which fund to buy before coming to any of these places – they do not offer advisory benefits
– Customer interface and subsequent quality of customer care are non-uniform – some AMC websites are very good others not so much.
Through your bank or its portal: This is the most obvious route for most investors. You can invest in mutual funds through your bank. Apart from visiting the bank branch, most banks also offer online ways of investing in MFs. Please note as we mentioned before, to invest in mutual funds you do not need to open an account with the brokerage arm of your bank.
– The convenience of going to a place you already know
– Trust factor in dealing with banks (however the trust factor is more of a mental thing because in reality when you buy a mutual fund the funds go from your account to AMC account directly and hence your investment is unaffected by what happens to the intermediary)
– In many cases, your RM/personal banker may also advise you on which fund to buy.
– Banks are distributors! So when you buy mutual funds through your bank you pay commissions and get lower returns.
– Most banks also have mutual fund arms. Data shows that banks more often than not advise customers to buy funds of their mutual fund arm. Now, this may be due to familiarity with schemes or some bias in advice – you can take your pick.
3. An offline distributor/”advisor”/”wealth manager”: Many people also invest in mutual funds through an advisor they know or somebody they know knows etc. you get the picture. These advisors may go by many names, but the standard industry term is IFAs (Independent Financial Advisors). Most of them are offline. Some may charge small fees others offer services for “free”.
– Convenience – Most of these distributors will make sure that all your documentation happens sitting at home and take care of pretty much everything else.
– Advice- IFAs almost always suggest which funds to buy to their clients
– As you would have figured out, IFAs are distributors! In addition to the fee that an IFA may charge from you, they also get paid regular commissions from the AMC on your behalf.
– Mis-selling of mutual funds i.e. selling clients only those mutual funds which pay good commissions to the IFA has been a big problem in this segment (very similar to insurance).
4. Online portals: Over the last few years, many online portals have also come up to help you invest in mutual funds. In many ways they are like the offline IFA reinvented for the digital age. More often than not they claim that their services are (you guessed it right !)“free”.
– Convenience associated with being online. Most of these platforms also make it as easy as possible for you to get your documentation done. They also offer good customer care.
– Various tools are available for MF research on their website and free “Advice”
– Biased-ness in advice remains a problem just like individual IFAs
5. New fee-only online portals which offer direct plans: After the introduction of direct plans, a new breed of online portals have come up which offer customers the ability to transact in zero-commission plans of different AMCs in one place. In addition, most of these portals also offer premium tools/advice usually for a fee. ORO Wealth is one such a platform.
– No commissions directly translated into higher returns for customers even if nothing else changes.
– Easy documentation, dedicated customer care
– Various tools available for MF research some of which are free
– Unbiased advice, since these portals do not earn commissions.
– Pay for advice/premium tools/transactions: Since these portals do not earn commissions, usually advice, premium tools and transactions come with a fee. Technically this fees is much lower than what most investors will unknowingly pay in commissions however human beings are irrational. And actually paying by your hand is often more difficult for people.
So this was a summary of how you can invest in mutual funds. Whatever route you choose just remember one thing – you lose more by not investing.