Mutual funds: Fat cats?

When the mutual fund industry was groaning about the ban on entry loads, the sounds seemed genuine, but not any longer! Why do companies start a mutual fund (big houses in other financial products) we assume they do this to earn money, correct? Well I am not so sure now.

The latest giga offer I have on an ELSS is stunning. I was being offerred 4.5% upfront commission – no trail I presume! The assumption being if I buy assets paying 4.5% upfront and the money sticks in my fund for the next 10 years, I hope to make some money! Fantastic thought, but flies in the face – what happens if 80% of the clients are ‘advised’ to remove it after 3 years? I have no clue and the thought is frightening. Does it mean that mutual funds make more money than the 1% fees that they are supposed to get? I think no. So why does a mutual fund give up its next 4.5 years’ income to accumulate assets? CEO’s ego? Creating an aum which they can sell to some new ‘bakra’ who will pay 7% for the AUM? I do not know. Do they have some hidden profits which myopic guys like me cannot see? I do not know.

Are they hoping that the ‘brokers’ will now start selling mutual funds and earn a lot of money? I already have calls coming in offerring free demat accounts, free mf buying and selling (no brokerage at all), from brokerage houses :). One bank has offerred me a ‘mutual fund transaction account’ for Rs. 400 a year – no uprfront brokerage. Of course here one understands that the bank makes a trail commission (other than the 2%+ that the fund throws at him), …however the profitability of the fund industry (which comes from sticky assets) and the brokerage industry (which comes from velocity of transactions) may not be what the doctor ordered for the investor! God bless.

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5 Responses to “Mutual funds: Fat cats?”

  1. Subra,
    Could not agree more with you. I’ve also been flooded by similar offers as mentioned by you. Well, if you ask me , how do we have news, if we do not have matters such as these which will percipitate action ( good or bad.. obviously the latter , i believe)going forward.

  2. I guess the fund house in question was ICICI Prudential, who had come up with this NFO with a high upfront of 4.5-5% and a lock in of 10 years and covered this with the saying that Equity is anyways for the long term and so on..Even IDFC came out with a tax saver with a very high brokerage structure.

    In the end, these high charges eats into the returns where the affected party is the INVESTOR ! I hope more investors read your blog 🙂

  3. Moral of the story – wait for Vanguard…

  4. Oh my GOD. Eye opener.

  5. I am a Mutual Fund Distributor and I know which Fund you are talking about. I have never ever been tempted to advise this Fund to my clients inspite of their ‘impressive’ performance (their words).
    but dig deeply, you will find that their ‘impressive’ performance is only for the last 2-3 years. What about the last 5 years, what about their performance in the 2008 Bear Market???

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