Do I Need an Advisor for Managing Money?
The increasing availability of information in the public domain has made people more aware about investing. This article delves into a few questions you should answer to yourself.
Brief -
I met a friend after a long time a few days back & he asked me how “small cap fund X” which he bought through a platform was working wonders & had generated a 13% return in a few months. He enquired about my returns & I admitted truthfully I am lowering my exposure to small caps & moving to large caps. You know what he answered -
“You are a fool to miss out on such high returns.”
There was more discussion about how he discovered that particular fund & he responded with -
“My broker sent me these top-performing funds of the year & I just invested in them looking at mouth-watering returns.”
This sent me wondering about my process of selecting an equity mutual fund -
Fund manager - experience of the fund manager, investing style (value, growth, contrarian, hybrid of approaches).
Portfolio holdings - which stocks the fund manager holds currently.
Expense ratio - matters somewhat but below 1% it is generally acceptable.
Portfolio turnover ratio - it means how much time the fund manager is churning the portfolio.
For example - if the manager has 100 cr of AUM & has bought & sold 50 cr of stocks during the year the portfolio turnover ratio is 0.50.
Generally, a ratio below 1 is acceptable.
Things I Ignore in selecting MF -
Past returns - As I have mentioned in my previous articles too that past returns aren’t a mirror of the future so ignore them.
Funds with portfolio turnover ratio above 1 time.
Comparison with 1-year returns of benchmark - in equity mutual fund you can't compare because it takes some time for holding to play out & earn a return for you.
Coming back to the friend meet -
I realized he had made the mistake my investing based on past return by investing in Small cap fund X. I asked him to move his exposure to consult an advisor who would provide him with -
Periodic rebalancing of portfolio - advisors generally shift allocation based on the goal.
Remove unnecessary weeds - they sell the funds that don’t align with the goal.
Provide safety of capital - The advisor would suggest appropriate funds according to the risk profile. As Warren Buffett often says
“Return of capital is more important than return on capital”
The friend asked what would the charges be & I answered there are 2 types of fee models -
Mutual fund distributor - which gets compensated out of your pocket to distributor’s without the client knowing that.
Registered investment advisor (RIA) - charges a fee upfront to the client without getting anything from the mutual fund. They are more likely to give you the right funds as they get fees from you & more unbiased.
To which I received another amusing query -
Why should I pay a fee upfront, the broker who suggested me didn’t charge anything ?
I checked out the holdings & found out that he had invested through a Mutual fund distributor & he wasn’t aware of the same. Eventually, after half an hour's discussion, he agreed to switch his funds.
Here’s a summary if you have lost in the middle -
Don’t look at past returns & extra returns over benchmark over a short period (below 1 year in equity)
Check current holding, portfolio manager, expense ratio & portfolio turnover ratio.
Sometimes paying out of pocket is less costly compared to hidden charges.
Consult a financial advisor or informed mutual fund distributor for the construction & rebalancing of the portfolio.
Conclusion -
No one in the world anything does anything for free, there is always a charge embedded somewhere.
Mutual fund companies are launching new mutual funds just to increase Asset Under Management (AUM) & some distributors selling without giving thought to investor’s risk tolerance.
Packaging old wine in a new bottle -recently SBI launched the SBI energy opportunity fund which is nothing but a fund that invests in PSU in the oil & gas sector along with renewable to ride on the recent PSU rally.
My advice -
If you are investing by yourself - be careful before you invest because people out there take advantage of even small vulnerabilities left out by you.
Hire an advisor or informed mutual fund distributor to do the work for you.