Mutual funds ‘Sahi Hai’ — if you bridge the advice gap

Investors must do their own research while also sounding out professional advisors

The government is encouraging all citizens to link their Aadhaar card number with their bank accounts by the end of 2017. If this initiative gets implemented, then from January 1, 2018, full KYC for mutual funds should get automatically completed when the investor submits the Aadhaar-linked bank account number. The mutual fund industry need not duplicate KYC efforts of the banking sector.

Digital consent-based portfolio data: A long-term investment strategy is based on the investor’s financial goals, risk profile, time horizon, liquidity needs and tax implications. A Robo-advisor with limited past investment data may not be able to provide holistic advice.

A service that is based on explicit digital consent of the investor (may be through Aadhaar OTP) can be structured such that the RTAs deliver relevant portfolio data via secure APIs to both RIAs and MFDs. Investors should also be able to revoke this access to their consolidated investment data.

Use of Aadhar-based eSign: Although ‘Digital India’ is a trending buzzword, wet signatures and paperwork have not reduced significantly. There are many low-risk operational processes that need not require wet signatures. Greater use of Aadhaar-based digital signatures can reduce paperwork, increase process efficiency and make Robo-advisors cost competitive while maintaining useful audit trails.

Flexibility to decide business models: Robo-advisors should be allowed to continue their operations either as an RIA or MFD. Now, innovative apps are available for retail investors to start investing with just ₹500 in Liquid Funds.

However, these apps cannot charge an advisory fee for low transaction amounts. Small investments need to be encouraged for financial inclusion. The flexibility to decide suitable business models, either RIA or MFD, will encourage innovation.

Robo-advisors aim to improve investment experience: Investment experience should not be confused with convenience or user experience. For a good investment experience, the necessary condition is a stable growth of money over a period of time with an understanding of the risk-return trade-off. Investment experience should not be evaluated at the time of buying; it will be experienced at the time of selling.

Sorting schemes by returns and investing based on past data is not generally accepted portfolio management strategy. It is probably mis-buying where the young professional equates financial investments with buying a product on an e-commerce platform. Robo-advisors can help solve this ‘advice gap’.

The importance of sound financial advice may not be realised when the markets keep going up. However, for the Twitter generation with attention span of 140 characters, we must qualify: “Mutual funds Sahi Hai” with professional advice and financial research.

The writer is a CFA, Member, India FinTech Forum and Founder, CashRich


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