It’s a fact that the majority of investors put money in mutual funds because they see this as a relatively hassle-free option. Unlike trading in equities, you don’t need a separate demat account and trading account and you don’t have to go through all the paperwork that any brokerage will demand.

And there’s the perception that mutual fund investing is safer by far, simply because an expert (the fund manager) is taking care of the technical aspects. Plus there’s the fact that a mutual fund can be far more diverse than an individual’s portfolio. And that’s why some experts say that a good mutual fund can be a financial plan in itself.

That’s also the rub—what is a good mutual fund scheme? Most of us trust the broker or agent’s recommendation blindly; after all, he has been in the business for a while and he should know what’s good and what’s not, right? Wrong. The agent definitely knows what’s good—for him.

Ajit Harshe, 56 Bhopal The case He wanted to invest Rs 50,000 in mutual funds and contacted a brokerage for advice. He was offered a “mutual fund which also has insurance cover”. It was only when he received the policy documents did he realise that he had been sold a Ulip The mis-selling The agent did not tell Harshe that he was selling a Ulip. He also did not tell him about the policy administration charges and that he will have to pay premiums for at least three years before he can exit The mistake Harshe did not ask the agent for details of the “mutual fund that also has insurance cover” The damage He will pay Rs 50,000 for at least 3 years for a policy he doesn’t need 3-4% is what a broker can make when he sells a new fund to an investor

Agents work on a commission basis—for every investment you make through him, he gets a specified percentage. Depending on the scheme, this percentage can increase or decrease. That’s why you have cases where agents have sold risky sector or thematic funds to investors with no appetite for risk.

Ajit Harshe is a classic example of an investor being taken for a sucker. Pleased with the prospect of getting something for nothing (a mutual fund scheme that came with free insurance according to the agent), Harshe was not on his guard. He assumed that the agent was recommending a mutual fund scheme and went ahead and invested in the scheme—only to find that he’d been sold a unit-linked insurance plan.

Unfortunately, Harshe’s is not a one-off case. Ask around in your office or in your neighbourhood, in the gym, in the supermarket, and you’re more than likely to meet many more Harshes with worse stories to tell. One might have been tempted by the promise of windfall gains in the form of dividends, not understanding that in a mutual fund scheme, dividends are simply a deduction from its NAV. It’s your money coming back to you. Others might have been actively encouraged to buy and sell frequently; that’s not good for your portfolio, but it earns a broker more commission.

A common ploy is to project a new fund with an NAV of Rs 10 as cheaper than an existing fund with an NAV of, say, Rs 40. “Investors are advised to sell existing funds even though they have been doing well and invest the proceeds in NFOs,” says Devendra Nevgi, CEO of Quantum AMC.

So don’t sit back and let the agent con you into buying something that’s profitable for him. Instead be a proactive investor. We’ve given you a list of five questions to ask yourself and the agent before you put any money in a scheme. But don’t stop with that. Read the offer document, ask a qualified financial planner to help if necessary, do some reading and research. If you don’t, you might as well hand over a blank cheque to your agent.

Questions to ask before investing in mutual funds

1. How has the fund performed compared with its category average and its benchmark?

2. How is the new fund different from existing funds? Does it invest in stocks and instruments that are different from those in which other funds invest?

3. What is the entry and exit load and expense ratio of the fund?

4. How much will you save if you invest directly in the fund instead of going through a broker or agent?

5. Are there any hidden costs associated with any freebies offered with the product?