Let me come straight to the point. Investors of Mutual Fund are being increasingly misled on FREE offerings that leads to a massive rip off on their wealth. In Hindi they say “Lene ke Dene” (ie instead of taking, you end up giving away much more!).
Here are two myths about FREE that we need to bust right away!
Most people in India invest in Mutual Funds through a bank or an agency and think it is free! They think that the bank or fund house pays them.
Some even think they pay only once and do not incur recurring fees. Of course the seller doesn’t educate and some even mislead or trick, saying if at all there is a cost, it is just one time!
We now know that nothing is free. The investors pay up to 40% of his invested money over time to recurring commissions deducted from his mutual fund account.
This is via regular plans (not ‘direct’ plans) that deduct a charge on a daily basis from the NAV. Smart investors have moved to Direct Plans, and Jamā has helped thousands of them.
Now we have another version of this game being played. Many online platforms have emerged saying that even Direct Plans are Free!
Now, a Direct Plan entails 0% commission. As per law, the advisor has to behave strictly in the customer’s interest cannot take money from the fund house.
So if they do follow both the spirit and letter of the law, can they pay their bills and survive? What is their pricing model and is it really FREE for you?
Running a large online operation (or even offline) serving thousands and lakhs of customers takes considerable effort and cost.
All of the above easily runs into crores. And we are not even talking about profits here. And neither are we including serious advisory effort since these platforms are keen to just acquire customers.
Why would smart (‘well paid’) people run something like this? You would say that they are burning investor money, so they may not be impacted much.
Even if an investor, especially a venture capitalist or a private equity investor is involved, they expect 10x returns from their investments. So eventually the business has to charge a hefty sum to recover it costs.
Else the business goes down. 9 out of 10 business fail and VC funded businesses fail even more. Therefore it is clear that at some point the pricing has to kick in. In fact the customer is already paying a huge price even now though the platform is ostensibly free.
When you ask these platforms these questions, you will hear some English on how they will ‘monetise’ their offerings. Here are a few known positions and why this is NOT in the investor’s interest.
|“Free Platform Claim”||What you PAY!|
|1. We will make money on B2B services.||· This is another way of saying that your data will be analyzed and potentially shared with other vendors |
· Any of the following could happen: pushed wrong products or services because you are basically a lead.
· The FREE platform is running a lead generation business. It can at best sell you products that may not be build true wealth for you, or at worst collapse under the weight of its own costs
|2. We will sell you Loans |
(eg: Loan against Shares)
|· This is like a bank offering you personal loans while also selling you mutual funds. No investor ever got rich doing that. |
· Why would you believe someone who is selling you loans while ostensibly helping you build wealth? Doesn’t it sound contradictory? Such contradictions also collapse under their own weight.
· Besides if you do not wish to invest in stocks and take the trouble of opening a mandatory demat account with its associated costs, why be forced to do so? Equity investing is not for all and depends on the investor’s appetite for risk.
· A demat account is not free and costs several hundred rupees per year. You also have to send your invested money to the platform instead of directly to the AMC/fund house. This could pose additional risk.
“Once you get into debt, its hell to get out” – Charlie Munger
|3. We will sell PMS and other exotic products||· PMS are one of the most costly investment products and charge 2% or more per year plus a profit share. |
· They also are known to churn portfolios leading to more ‘brokerage’ revenues to their partners.
If you’d invested $1,000 with Warren Buffett in
1965; it would currently become a nest egg of
$4.3 million. However, if Berkshire had been a
hedge fund charging 2 & 20 (2% annual fees
and 20% share in profit), that $4.3 million
would have accrued $300k to the you with a
stunning $4m to the manager
– Terry Smith, 2010
|4. We will charge later. First open an account with us.||· Be ready for a surprise later! |
· Would you trust someone who slaps a fee later citing unavoidable business circumstances?
|5. We serve ads (ie we promote some producers for a fee)||· Ads on television is fine, but on your investment platform? What is the sanctity of the advice you get there then?|
|6. We allow AMCs to sponsor ‘investor education’||· This is another way of serving advertisements. |
· What stops the platform from promoting a particular AMC (though it has poor performing funds) in the name of ‘investor education’?
|7. We (or a sister brand/company) sells Investment linked insurance products||· Insurance with investment is a toxic combination and has proven to destroy wealth. The NAVs shown on ULIPs hide the additional costs that are embedded. Most endowment and ‘money back’ products have given just 5% to 6% returns! |
· So if the bazaar you are buying mutual funds also has an interest in pushing insurance products, then do be cautious!
|8. We are in the MF business as a Registrar||· There are free platforms like MFU and MyCAMS. They are paid by the AMC for ‘ book keeping services’. |
· The exact pricing and transfer mechanism is not clear as several kinds of feeds get clubbed together
· Ideally SEBI must not allow this as there is a conflict of interest and the producers are paying for this.
· These do not provide advisory services. Even their platforms are basic.
These are publicly shared positions. What is not publicly shared and might be happening is any of the following.
|9. Take money from some the fund houses / producers in other forms.||· Unfortunately some practices like these may happen. It is not clean and not scalable either.|
|10. AMC / Fund House will ‘buy’ ads from our affiliate media publisher.||· AMC / Fund House can ‘buy’ ads from the platform’s affiliate media publisher. If the ‘FREE’ platform is part of a large media house (owner or large investor). |
When big media, big funding and free models converge, you can clearly see that buyers get taken for a ride. So, let us not fool ourselves. The money is coming from you, the investor.
Some of the players are now large and several years old (cannot call them new startups). They and their backers are part of the BIG industry, heavily funded and do not mind buying up customers. However if one compromises on basic principles, one may grow rapidly now but may not sustain in the long term.
If something is too good to be true, then probably it is indeed not good for you. If you as an investor want to have your cake and eat it too, you may have a serious case of stomach ache. IN this case you may lose your hard earned money to poor products.
The more discerning customers will see this through, and ask the tough questions.
You are paying in terms of the time you spend. A person earning 6 lakhs per year, makes about Rs 300 per hour. If you are spending any time on the platform, then you are actually paying thousands of rupees anyway.
Why not pay a few hundred rupees as flat fee for a transparent model and get some peace of mind? Or pay a small fee for dedicated and professional advice, if you are an HNI looking for fiduciary service.
Are you a bait to offer other products? If so what real interest will they have to help you grow your wealth?
When some bankers take interest in your wealth, we have seen the result! Mis-selling and worse, a serious destruction of wealth! (eg: Suchitra Krishnamurthy, court case was settled later after four years of dogged fight by Suchitra). She was promised 24% returns and the bank looted her account by selling wrong products and excessive churn.
When people in other businesses take interest in your wealth, then what will happen? Not everyone may have the media weight and tenacity to fight when they get cheated.
All of this brings us to why at Jamā we have taken the tougher option of putting a reasonable price to our offerings:
1. We need to sustain ourselves for the long run and hence arriving at a fee that the customer is willing to pay is important.
2. A Clean Pricing Plan: What we charge is still a fraction of what you benefit. We pride ourselves that the benefit is 10x the comparable cost that you pay.
3. We make revenue on advisory services, where customers enjoy dedicated support and professional SEBI RIA quality advice. This is easily done at a cost much less than what investor is already paying to brokers (though indirectly, but clearly identifiable at folio level).
4. We are bootstrapped which means no institutional investor is breathing down our neck and influencing our behaviour, strategy or pricing. Now that makes us masters of our destiny and serve our customers with complete focus.
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