Where to buy a mutual fund?
This is good for investors who do not need the advisory services of agents and are well-versed with the fundamentals of the fund industry. The channel provides the benefit of low cost, which significantly enhances the returns in the long run.
This channel is widely prevalent in the fund industry. It involves the use of agents, who act as intermediaries between the fund and the investor. These agents are not exclusive for mutual funds and can deal in multiple financial instruments. They have an in-depth knowledge about the functioning of financial instruments and are in a position to act as financial advisers. Here are some of the players in the indirect distribution channels.
Investors have varied investment objectives and can be classified as aggressive (investors willing to take high risk and hence expect high returns) , moderate and conservative (investors are not willing to take any risk and hence ready to accept very low returns), depending on their risk profile. For each of these categories, asset management companies (AMCs) devise different types of fund schemes, and it is important for investors to buy those that match their investment goals.
Funds are bought and sold through distribution channels, which play a significant role in explaining to the investors the various schemes available, their investment style, costs and expenses. There are two types of distribution channels-direct and indirect. In case of the former, the investors buy units directly from the fund AMC, whereas indirect channels include the involvement of agents. Let us consider these distribution channels in detail.
a) Independent financial advisers (IFA): These are individuals trained by AMCs for selling their products. Some IFAs are professionally qualified CFPs (certified financial planners). They help investors in choosing the right fund schemes and assist them in financial planning. IFAs manage their costs through the commissions that they earn by selling funds.
b) Organised distributors: They are the backbone of the indirect distribution channel. They have the infrastructure and resources for managing administrative paperwork, purchases and redemptions. These distributors cater to the diverse nature of the investor community and the vast geographic spread of the country by establishing offices in rural and semiurban locations.
c) Banks: They use their network to sell mutual funds. Their existing customer base serves as a captive prospective investor base for marketing funds. Banks also handle wealth management for their clients and manage portfolios where mutual funds are one of the asset classes. The players in the indirect channel assist investors in buying and redeeming fund units.
They try to understand the risk profile of investors and suggest fund schemes that best suits their objectives. The indirect channel should be preferred over the direct channel when investors want to seek expert advice on the risk-return mix or need help in understanding the features of the financial securities in which the fund invests as well as other important attributes of mutual funds, such as benchmarking and tax treatment.
Research about best performing funds and do investment through direct channel to get good returns in long term.
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(Posted date - 28 Feb 2012)