This is quite the opposite with private sector banks.

Every institutional investor betting on India feels that investing in private sector banks is unavoidable. They are sort of proxies on India’s economic growth.

Undoubtedly, the track record of private sector banks has been better than their public sector counterparts. As a result of efficiently utilising capital, good quality management, and superior earnings growth, they outperform PSBs almost in all departments.

“Fee income” is an important constituent of the consistent earnings growth they post.

Do you know what this fee income comprises of?

When you buy a mutual fund or an insurance policy or any other third party product from a bank, it gets a commission for this distribution service.

In other words, aggressive selling of all third-party products boosts their earnings, and consequently, the returns to their shareholders.

But do you get…

1. Quality advice—No
2. Cheaper service—No
3. Convenience—Yes
4. Personal attention—Yes, but highly subjective to the size of your portfolio. If you are an HNI, you would be treated like a king, else like a voter.

Let’s talk about all aforesaid points one by one.

Quality of Advice

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A big boost to a bank’s earnings comes from commissions, not from the quality of advice!

Have you checked the commissions banks get when you invest through them?

• On equity schemes, other than Equity Linked Savings Schemes (ELSS), banks typically get upfront commissions of up to 1%. The trail commission ranges from 0.5% to 0.75%.
• On ELSS and close-ended funds the mutual fund house may pay the trail commissions upfront. Hence, banks may earn up to 6.5% commissions, for selling such schemes.
• Surprisingly, mutual funds pay generous commissions on income funds and debt-oriented hybrid funds. There's nil or very negligible commission paid on liquid and ultra-short term funds.

Most of the banks claim their recommendations are funds handpicked by their expert mutual funds research team. Do you think, the banks will be interested in distributing schemes if they earned zero or low commissions?

They have to report a “consistent rise in their fee income” every quarter. So, don’t be surprised if their recommendations change once in 6-months—conveniently with the commission structures.

Cost of Service

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Banks make you invest in regular plans which have a higher expense ratio. Hence, investing through banks is expensive indeed!

Banks don’t charge you a fee  upfront. If that makes you believe that you are not paying for the service, then you are, perhaps, living in a fool’s paradise.

Have you seen a bank relationship manger insisting their customers to invest in direct plans offered by mutual funds? They will not; unless, they start collecting fees from you and become accountable for their advice.

PersonalFN studied the expense ratio structures of 178 prominent diversified equity mutual funds to understand the quantum of difference direct plans can make.

And here are some interesting observations

Regular plans
Schemes with an expense ratio of more than 1.5%	174
Schemes with an expense ratio of more than 2.0%	165
Schemes with an expense ratio of more than 2.5%	73

Sample size 178
(Source: ACE MF)

Mutual fund houses incur high distribution costs and other administrative expenses which are passed on to investors in the form of higher expense ratios. As against that, when investors approach fund houses directly, there's a great deal of saving, which too, is passed on to mutual fund investors.

Direct plans
Schemes with an expense ratio of less than 1.0%	27
Schemes with an expense ratio of less than 1.25%	67
Schemes with an expense ratio of less than 1.50%	104

Sample size 178
(Source: ACE MF)

Some more observations…

• The average difference between regular plans and direct plans is 1.0%. In other words, investing in direct plans means saving an average of 1.0% p.a.
• The difference between regular plans and direct plans of newer schemes is higher than that between older schemes in many cases.
• The highest difference between a regular plan and a direct of the same scheme is 2.64%. This goes to show, some schemes are being promoted by paying huge commissions.
• However, it’s also observed that, some poorly performing schemes have a lower expense ratio under both, direct and regular plans. Doesn’t that mean, the expense ratio isn’t the only criteria to select a mutual fund scheme for your portfolio?

If you are investing Rs 10,000 per month in a direct plan of a mutual fund scheme through the Systematic Investment Plan (SIP), there’s a possibility to make an additional Rs 26.5 lakh in 20 years.

Convenience

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This is the biggest Unique Selling Point (USP) of banks. You have a choice of investing through their dedicated net-baking platform. And, if you are investing offline, you usually have to sign the application and cheque; the bank employees fill in the details. These days, banks invest massively in technology and their platforms work at par with any other efficient investing platform. As a result, the whole process of investing in mutual funds can be paperless and extremely painless.

Personal attention

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You may not be an attention-seeking person, but if somebody’s giving you respect and personal attention would you reject it?

Banks know this well. And if you have big money to invest, they would appoint experienced and energetic people to assist you in every process of investing.

So the bottom line is…

Banks can give you good service and personal attention but the performance of investments, cost of advice and its quality might be the grey areas. So if you are okay with getting more attention at the cost of poor advice, the banks won't disappoint you. And you won't need to consider an alternative.

And before you jump to alternatives, please understand the basics first

• Good advice doesn’t come free
• What comes for free doesn’t mean good quality
• And what initially looks difficult, may not necessarily be difficult.

Many of you might need explanation on the point number 3 above. Let’s decode it — step-by-step.

Switching from heavily human interfered system to completely automated system isn’t easy for many of us. But the application of technology always looks difficult on the onset. In 1998, nobody would have thought that in the next two decades, the “aam adami” would use digital modes to pay and transfer money. But, the digital payment is one of the most sought-after payment methods today. 

Similarly, if you’re not on the newly invented technological platforms——a. k. a. robo advisors——for investing, you might miss the opportunity to generate higher returns at lower costs.

How to replace banks in the process of mutual fund investing?

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You have several alternatives.

Choice 1# - Do Your Own Research

Doing research work yourself and investing in direct plans of mutual fund schemes that have a proven track record across timeframes and market phases. Consistency in performance and the process-oriented nature matters the most.

Flipside

Finding a mutual fund scheme that has a good performance record across time frames and market phases is easier said than done. You need to invest in software and need to have an eye to spot the trends using various statistical tools. Moreover, understanding qualitative factors such as quality of portfolio, quality of management, and effectiveness of portfolio strategies requires experience.

Choice #2 – Rely on Unbiased Fee-based Advisors

Taking advice on mutual fund schemes from unbiased research oriented fee-based advisors and investing in direct plans. Here, your effort is significantly reduced because you don’t have to do any research yourself. Unbiased research of mutual funds may ensure the quality of your mutual fund investment portfolio.

Flipside

When you invest in direct plans, there’s nobody to offer you the routine service from the bank’s relationship managers.

Choice #3 – Opt for a Fee-based Robo-advisory Platform

Seeking the assistance of fee-based robo-advisory platforms offering unbiased mutual fund recommendations and facilitating investments in direct plans of recommended funds—this is the most effective way of investing in mutual fund schemes which might generate superior returns and control costs. 

Flipside

The entire design of the platforms is to offer effective advice and control costs wherever possible, without compromising on the technology, quality of advice, and performance. Hence, receiving personal attention relationship managers appointed by banks usually give is extremely difficult.

In case you haven't heard about robo-advisory platforms, you might read these articles.

Is Robo-Advisory An Option for You? Find Out Here…

How Robo-advisors Make Investing Easy And A Lesson From Stephen Hawking

This is How a Smart Robo-Advisor can Help You Chart Your Asset Allocation…  

Is Your Robo-Advisor Competent To Offer You Sound Advice? 

In a nutshell

A fee-only robo advisory platform can help you earn more returns, which isn't possible with bank-run distribution service. Fee-based robo advisory platforms can potentially outperform banks in every department except, interpersonal interactions that people often miss with machines.

PersonalFN understands the importance of human interactions in financial matters. It hopes to set-up a helpline in the future to assist people uncomfortable with technology. PersonalFN's humblest motive is to encourage even non-tech-savvy people to invest on robo-advisory platforms.

Can PersonalFN help you in this?

It certainly can!

Now, wouldn't you be delighted if somebody else handles your investments for you at a nominal cost and helps you invest in direct plans?

PersonalFN's soon-to-be-launched service may be your best bet.

Backed by its massive experience of well over 15 years in the financial market, PersonalFN has come up with an exclusive platform, uniquely built in such way that it knows the market -- and above all, it knows YOU!

You just got to follow these simple steps below:

1. Complete the registration

2. Submit necessary documents to activate your investment account

3. Assess your risk profile

4. Get a recommended portfolio based on your inputs

5. Invest with a sinle click

More reasons why you should invest through PersonalFN's platform

• It can help you reap extra returns since it provides only Direct Plans.

• It brings outstanding research experience of over 15 years. (Outperforming the BSE-200 index by 80 percent!).

• It comes at a pocket-friendly price.

Want to know more?

Your wait is going to end soon!

Stay tuned.

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Comments
Scarletpimpernel20000@gmail.com May 24, 2020 Please let us know your charges
jobs.arulmurugan@gmail.com May 30, 2018 Good marketing

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