Joydeep Ghosh: Imagine 31% annually for 3 years...

Retail investors should be willing to pay for investment advice for good returns

Retail investors have seldom had such a bad time. In the last three years, few mutual fund distributors have approached them to put money in equity funds because of the entry load ban.

What have they really saved? – 2.25% on equity funds or Rs 225 on an investment of Rs 10,000 – barely worth saving. If one goes by returns from large-cap funds in the last one year, there are many which have returned around 10-15% (as on September 21) or even more. Only gold would have competed with equity funds with returns at 12.20%.

In August 2009, the Securities and Exchange Board of India (Sebi), under Chandrashekhar Bhave, banned entry load – the amount that was paid to distributors for investing in equity and debt funds due to mis-selling by distributors.

Many distributors either sold multiple schemes – some investors had as many as 150 or 200 schemes – or made investors sell and reinvest in the same schemes to earn the 2.25% fee in equity funds. After the entry load was banned, many distributors are not pushing mutual fund schemes any more. Many of the distributors have gone out of business as well. The result: Systematic investment plans are not being renewed or lumpsum fresh investments are not being made aggressively. Of course, market conditions have not been inspiring which has dented investor sentiment further.

Consequently, the industry has lost folios – millions – in the last three years. This August 460,000 equity folios were closed, taking the number of exits from the industry to 2.3 million in this calendar year. Staying away, however, has only been bad for the investor.
If he/she had paid for investment services, say even 1-2% (investment experts charge this percentage for advisory services), there was money to be made. Yes, the flipside is that despite paying the money, the distributor or financial advisor may not have given the best advice and there could have been loss. But in the hands of a good advisor, there was serious money to be made. Over a three-year period, there are equity funds like FMCG and pharma which have given 31% and 22.23% annualised returns. If someone had invested in an FMCG fund three years back, he would have more than doubled his money. Sadly, there is no one pushing them.

It’s time retail investors paid for their investment services. It need not be through an entry load but payment, base on performance and not for just selling the product. Anyway, they are paying for number of other investment or purchases such as, brokers’ fees for buying a house. Like a property, investing in equity is creating an asset.... Imagine earning 31% annually for three years.