How to Avoid Mis-Selling in Mutual Funds?

Many public and private sector banks own mutual funds or have a majority stake in Asset Management Companies (AMCs). Banks sell mutual fund schemes of their subsidiary mutual funds and may resort to mis-selling. SEBI, the capital market regulator, checks if banks are resorting to mis-selling to push their mutual fund schemes. Mis-selling is a sales practice where products or services are deliberately misrepresented to customers. How can you avoid being mis-sold in a mutual fund scheme?

What is mis-selling in mutual funds?

Mis-selling is a sales practice where banks or financial institutions may entice you to invest in a mutual fund which gives low returns or has an unduly high risk so that they can earn commissions. Mis-selling results in you being sold a mutual fund scheme that doesn’t match your risk profile or help you attain your financial goals. 

According to SEBI, mis-selling is the sale of mutual fund scheme units directly or indirectly by persons by making false and misleading statements. Moreover, omitting or concealing material facts, suppressing associated risk factors of mutual fund schemes or not taking proper care to ensure the suitability of the mutual fund scheme to the buyer is mis-selling. 

How can you avoid being mis-sold in a mutual fund scheme?

AMCs offer various mutual fund schemes to help you attain multiple financial objectives. For instance, equity funds are suitable for long-term financial goals, hybrid funds for medium-term and debt funds for short-term financial goals. 

However, your bank relationship manager may sell you a mutual fund scheme promising higher returns in a short time. You can save yourself from mis-selling if you invest in mutual funds that match your risk tolerance. Moreover, you must invest in mutual funds only if it helps you achieve your financial goals. 

Often, bank relationship managers may lure you into investing in equity funds by comparing their returns against bank fixed deposits. However, equity funds and bank FDs belong to different asset classes. It is not right to resort to a comparison between equity and debt asset classes. You must understand that equity funds are wealth creators over time, whereas bank FDs protect your portfolio during a stock market downturn. 

You must check the choice of mutual fund products offered by the bank. For instance, is the bank promoting only one mutual fund scheme or products from a single fund house? It helps to check if the bank is promoting only the mutual fund schemes of its subsidiary AMC which is a red flag. 

Please do not fall for the past performance of mutual fund schemes, as it doesn’t guarantee future performance. It helps to check if the mutual fund scheme has performed consistently over three to five years against the benchmark and peers. Often, bank relationship managers sell mutual fund schemes of their subsidiary AMCs that have underperformed over time. 

You must analyse the risk in a mutual fund by looking at the mutual fund riskometer. It educates you on the risk associated with mutual fund schemes. For instance, the new riskometer segregates the risk of mutual fund schemes into low, low to moderate, moderate, moderately high, high and very high. 

Market-savvy investors with high-risk tolerance may opt for equity funds with higher risk for higher returns. However, conservative investors may opt for mutual funds with low or moderate risk even though they have to compromise on returns. In a nutshell, do not invest in mutual funds based on the advice of bank relationship managers but do your research before investing in mutual fund schemes.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@clear.in

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