Happy New Year to all my readers. May you all have a great financial year ahead. There has been a gap since my last blog. The reason being I have been travelling a bit. I will try to be more regular, this year.
I have been time and again emphasizing that stock markets are suitable for investing only for patient people who can stay invested. Mutual Funds are no different from direct stocks. They are also investments in stocks, only difference being that the MF manager invests on your behalf.
But today I will discuss the strange case of Mukul Goswami and his Mutual Fund Agent/Advisor. A few months back Mukul came to me for advice. He needed to pay an installment for his house and needed money. He had planned to pay by redeeming his Mutual Fund units. He wanted to know whether he should sell his units at that time.
Mukul had made a basic error in his allocation of funds. Meeting your “need” from stocks is inherently flawed, but that situation could not be corrected, now. So, I had advised him that he should sell in a few months when the markets improve. So, last week we spoke again. The markets had risen and it was time to gradually redeem.
Mukul was posted in Ambala in 2009 and had invested about Rs 300,000 in UTI MNC Fund. He got about 16200 units at the then NAV. So far, so good. But what happened after six months was a strange thing. His MF advisor, systematically switched his entire corpus into six different schemes over a period of one to two years.
The result, now he had six schemes in his portfolio. Out of which four were in a loss. Two had given marginal returns. If he were to redeem all the investments his advisor had made, he would get approx Rs232,000. A loss of Rs68,000 on his investment. As I always say, 85% mutual funds sooner or later give returns below the sensex/its underlying linked index. And it is therefore, important to stay with your investments for some years. Let us look at the situation , if Mukul had not allowed the MF advisor to do anything. The NAV of UTI MNC Fund on 07 Jan 2013 was about Rs23.20. His redemption amount would have been Rs 375,840. So, the net loss incurred by Mukul was Rs 143,840. He had been taken for a nice ride!
What do we learn from this? First thing, do not believe any agent or advisor, till a trust is developed between you and him. Second, most of the agents and advisors want to maximize their commission and are less interested in your profits. They will always advise you to switch schemes, transfer to some other plan or redeem midway and put in some other New Fund Offering (NFO). Why? Because they are offered nice commissions for getting investments into a particular scheme. More you switch, the better for him. It is like trading in shares, the more you trade, the more the broker gets rich. Thirdly, give time to your investments. A minimum of four to five years is a must. Anything lesser, deploy your money elsewhere. Because then it is gambling and not investing. Fourthly, look for a mutual fund which does not pay commissions to agents, thereby it increases your returns.
End of our discussion, I advised him that whenever he has funds and wants to start again, he should pick one to two schemes of equity oriented funds, one to two schemes of debt funds and one good ETF. Then he should spread his allocation of funds and continue this investment on an auto pilot for 5 to 10 years. The best fund house which I trust and advise is Quantum Mutual Fund and its various schemes. It is the only direct to customer fund. Hence, no agent will advise you on that. Have a great mutually beneficial year ahead.