Retail investors have led a life of less confusion for some time. Bad market conditions, along with banning of entry load by the Securities and Exchange Board of India (Sebi) in August 2009, ensured many distributers were neither motivated nor inclined to churn aggressively — asking existing investors to move to another scheme.
But, the new guidelines from Sebi could lead to just that – more churning through mis-selling. The churning in the Rs 7 lakh-crore mutual fund sector is 20 per cent annually, according to the market experts.
Now, with the market regulator allowing an extra 30 basis points expense ratio from all investors if a fund house manages to get 30 per cent of its fund collection from beyond the top 15 cities, experts say churning may increase, especially in smaller towns.
“Since the fund house and distributors stand to earn additional money, there could be a case for churning in smaller towns,” says Gaurav Mashruwala, a financial planner. Consequently, it is important to ask questions to distributors.
PITCH ONE
“RBI will cut rates soon, move your money from debt to equity fund”
Answer: What ensures that equities will do any better, in the short term? Also, if there are rate cuts, the value of debt instruments will increase so I will make capital gains.
Also, if you are moving from a debt fund in less than a year, the capital gains will be added to your income and taxed. If you earn say, 12 per cent annually or six per cent in six months and exit, there will be a 30 per cent tax (for someone in the highest income tax bracket) on the capital gains or 1.8 per cent. In addition, there will be an exit load of 1 per cent. So, you gain only 3.2 per cent.
With Sensex annualised returns of 3.33 per cent in the last three years, debt has easily outperformed at eight-nine per cent. Yes, if the market were to correct sharply, one can look at it as an opportunity because net asset values would go down sharply allowing you to buy more units for the same money. And, in the turnaround situation, one would stand to gain substantially.
PITCH TWO
“Shift to this equity fund. It has returned 10 per cent in the last six months”
Answer: Isn’t there a short-term capital gains tax of 15 per cent? I will gain 8.5 per cent. Also, there could be an exit load (on principle plus capital) of a per cent or more which many fund houses have imposed, if you shift from a scheme in less a year.
PITCH THREE
Dividend scheme will earn you regular money. Take it out of a growth scheme.
Answer: Why should I take dividend income? The NAV will also fall bringing down my returns? In addition, there will be no compounding of my dividend income? Sometimes, distributors ask you to move within the same scheme.
Amar Ranu, senior manager (third party products), Motilal Oswal Private Wealth says, “The distributor will ask the investor to switch to the dividend option of a scheme from the growth option, as the former is about to announce a dividend payout. The investor will get lured to the dividend option without realising that they are moving within the same scheme. Even though there is no actual loss, you are still being misled.”
PITCH FOUR
Your ELSS has completed three years. Now there are no benefits.
Answer: There is no loss either. There is no capital gains tax after one year. After the lock in period, if the fund is doing well, one should continue with their investments. “Some distributors could try and coax the investor to redeem their units from the tax saving scheme saying that since there is no tax benefit as such any more, it would be wiser to nvest in say an equity fund that is being suggested”, says Suresh Sadagopan, a certified financial planner.
PITCH FIVE (the oldest one)
If you move your money into this new fund offer, you will get units cheaper.
Answer: Whether I buy at the NAV of Rs 10 or Rs 100, the result is same. “Distributors would try to sell products to investors who did not need it. It could be exotic sounding and could promise higher returns than his existing scheme”, says Ranu.
