Mutual funds strategy in bank

People know that mutual funds and banks are two entirely different businesses. Mutual funds are in the business of investments, but banks are for savings, and both of them have different strategies. If you want to save your money, banks are the best option, while you can choose mutual funds if you aim to invest your money for building wealth. And these businesses are governed by different authorities. SEBI regulates mutual funds, whereas RBI governs banks. But you can see some banks also sell mutual funds. And there is no functional connection between these two as both are two different companies. Let us check the mutual fund strategy in banks in this post.

Banks are for saving, not for investing

Due to economic uncertainty, more people prefer to save their money in banks rather than investing. It is certainly not a good practice for them as well for the economy. As an instrument of growth, investment is the best option. Most banks advise their customers to save money rather than encourage them to invest. Some banks have their own mutual fund houses, and they sell their funds through banks. For example, a commission data study reveals that more than 95% of the commission earned by the State Bank of India for the financial year 2016 was through selling mutual funds from their own fund house products.

What is the strategy of banks for selling mutual funds?

Many consumers invest in mutual funds through their banks. But in such cases, banks act as a vendor, not an advisor. When they introduce a mutual fund product, you must know whether it can suit your needs or not. Usually, banks show a product that increases their interest. Even if they are in the hat of vendors, they play the role of advisors.  Most customers get influenced by the product choice of the bank manager. A customer does not visit the bank asking for a particular mutual fund product. Bank pushes the customer to buy the fund without considering the needs and financial goals of the customer. Banks are only the distributor of mutual funds, and their employees do not advise customers about the pros and cons of their products. Instead, they aim to sell it. And they get incentives in the form of sales commissions.

You cannot get the product that you need

Many banks started to sell financial products, and mutual funds are one of them. Banks are mere a sales channel, and most of the products are from their own fund houses. Or they tied up with other fund houses to distribute their products for a commission. If you invest in mutual funds through banks, you cannot choose a product that fulfills your financial goals. Another problem is the lack of proper diversification of your portfolio.

A customer needs different asset classes like debt, equity, real estate, and gold for safe investing. If you choose equity, a good mutual fund advisor helps mix up small-cap, large-cap, and sector funds to diversify your portfolio. But if you invest through a bank, you will be forced to select different schemes of only one fund house.

Investing in mutual funds through banks is not a good idea

Since banks are more about savings, they do not specialize in investing money for building wealth. Besides, they have limited mutual fund options to choose from. Most of the earnings of the bank come from the commission instead of providing quality advice. The truth is that banks do not interest to distribute mutual fund schemes that offer zero or low commissions. Banks are certainly a safe place to save your money for a sudden financial need. But you cannot find it as a good place for saving.

Investing in mutual funds through banks is not a good idea because they ask you to invest in regular plans. And such plans have a high expense ratio. They might not charge anything from you as fees. But you cannot choose funds for your financial goals and diversify your portfolio if you invest through banks. Apart from that, the bank charges a small fee as a convenience charge for each installment. That means you need to pay that convenience charge to the bank every month with your SIP installment. For example, if your SIP installment is 1000, the bank charges a fee, say 35, and the bank deducts Rs.1035 every month for your mutual fund transaction.  You can avoid paying that convenience fee if you approach a mutual fund advisor for fund management.

Seek the help of an independent and established financial advisor

Before investing in mutual funds, you must have deep knowledge about the structure of this financial instrument. With a shallow financial literacy, you cannot build wealth by investing in mutual funds. By paying a small fee, you can get the service of an established mutual fund advisor who can answer all your queries on portfolio construction, costs, and taxation, lock-ins, and exit costs. Besides, he helps you to choose the right funds to make a diversified portfolio.

Many people choose mutual funds through banks which is not a good idea to invest in building wealth. Banks are mainly for savings, and even if they sell mutual funds, they prefer to sell products of their own fund houses. And you cannot invest in a fund that fulfills your financial goals if you invest in a fund suggested by your bank relationship manager. It also does not help you to diversify your portfolio. Always approach an expert fund advisor because he can give you exposure in the mutual fund market with his professional expertise.  You can expect good returns if professionals manage your money. They help you to reduce the risks with a well-diversified portfolio.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh