Price of Peace ........

“You get free cheese only in a rat’s trap ~ Russian saying.”

Did you ever inquire how much your paperboy makes out of his daily delivery of newspaper at your door-step or did you question your milkman on the cut he gets by distributing the milk packets? But why do people investigate on what financial products/services distributor makes through a sale and why does one ask to part his income? Does that not entitle for a bribe? Why don’t people consider it as another service they pay for and it is the charge paid for their convenience?

The answer, though, is simple it is the Indian psyche` and the attitude out of the past experience compound the whole issue. For instance, when you purchase a consumer durable or any article in a retail store, you mayn’t haggle over the price and at most instances you would just pay for the MRP, if there‘re no special discounts, offers, etc. this is ‘coz with the physical acquisition or ownership of the product comes the comfort while none of the financial instruments offer the physical acquisition though you’re deemed the owner.

Moreover, it is their usage that calls for a difference – these instruments promise certain benefits at / after certain period of time which complicates the things further. Forth presents the role of the intermediary here, educating the instruments and related financial instruments overall and in particular the suggested instrument. Interestingly, I’ve found in my limited experience that people rather believe friends/peers than expertise. I can recount numerous examples where people swayed decisions jus ‘coz their friends offered free lip-service.

Till now in this post, I’d been conditioning the reader, that’s you, on the recent views of no-load Mutual Funds. I would introduce to the various charges that encompass running in any MF, starting with the entry load – the charge which is a percentage of the investment that is used to compensate the intermediary by the Asset Management Co (AMC); exit load – a percentage charge of the fund at the time of redemption / exit of the investor from the fund; Fund Management Charges – an invisible charge which is levied for managing the investor’s fund, this is invisible ‘coz the NAV is decided taking this into account. In general, these loads/charges are competition-driven; are range bound and it is either of the entry or exit loads.

The recent SEBI proposal is not to charge the entry load for investors who would directly buy from the AMC, i.e. if you’re transacting online directly with the AMC. It is a novel idea, though one important aspect of the whole sale is missing ~ educating the customer. When the retail participation in the equity markets has just seeing an upturn and many of these companies are trying to expand the market, this move probably acts in as contrary.

Imagine, a new fund being announced or even you’re mulling to invest in a fund, how would you choose-is it just with the fund’s performance, the risk/return profile or on the advice of your friend and if so how would you know if that particular fund suits you or your needs. This surely requires the expertise and most importantly time. How many of the investors, their friends/peers possess such expertise and where is the time for acquiring such in-depth knowledge.

The need of the hour is to enhance the trust of the service providers like in the US, the regulator has to establish a public database of the qualified professionals providing such services and even their track record. This helps the investor to cross-check the credentials before gaining the confidence and for the intermediary part, they (we) have to believe that there is lot harm in mis-selling and believe that a happy customer always benefits in a longer run.

As per the investor, by not undercutting the intermediary's share one increases the responsibility and accountability of the service provider and there by gain mental peace of investing in the appropriate instrument suiting the needs.