This is a frequently asked question. Before dismissing it as a trivial thing, it is important to understand why this question comes up. The question is often asked by people who are familiar with investing, mutual funds but somehow have been lulled into complacence by the ‘financial industry’. By the time they ask, it is a bit late as they would’ve otherwise saved a few years of their working lives. Leaky buckets would have ruined their financial goals to some extent.
I call this leaky bucket syndrome. Imagine you were a water carrier from 1000 years ago, whose purpose is to fetch water from a nearby river. You have two large pots strung to a pole that you carry back and forth from the river. You are busy, day in and day out carrying this water.
Now, what if the pots that you are carrying have tiny holes in them causing the water to leak out slowly. Sometimes that water from your pot drops to the ground. Often it evaporates from the pot’s surface without you even knowing that it is leaking!
This is exactly what happens when the banks and brokers take a tiny slice of your hard earned money as commissions and fees. If purpose of employment is to make money then why get into leaky arrangements. These transaction fees pale in comparison to the huge hidden commissions that are taken by the brokers, agents and banks.
Most employees who join new companies are herded by banks to open their bank accounts. Every employee needs a bank account anyway! But very few are taught on how to use the bank account smartly. I have previously written that a bank account should be like a working desk, and not a storage place.
The employees are pushed into costly arrangements: insurance policies, ‘retirement’ plans, child savings related insurance plans, credit cards. The bank savings account itself is a costly place to keep money as it earns less and whatever you earn is taxed. Fixed Deposits may give a little extra interest income but that is also taxed every year, which means less of the gain is carried forward to compound the next year. Even if the employee is exposed to mutual funds, it is to the regular plans that carry 1 to 1.5 % commission. Leaky buckets everywhere!
Once a youngster is used to these tiny charges, fees, commissions then it is a gravy trail for the ‘industry’. Not for the employee who has to work long hours and long years to reach her financial goals.
The banks are so brazen now that they are actually hiking up transaction fees after demonetization (or remonetization) that happened in November 2016. With more digital trnsactions, shouldn’t transaction fees drop?
Finally we come to the best approach to avoid leaky buckets. This applies to 99% of the people who are busy with their day jobs. Mutual funds are one of the best avenues to invest and grow money while beating inflation. One can invest directly in various bonds or company stocks, but who has the time to do the research and constant monitoring?
Within Mutual Funds, Direct Mutual Funds, or those with direct plans (as opposed to regular plans that carry commission) are the best choice. The reason is simple, no leaky buckets here!
Now, how does one invest? There are a few options.
One can invest directly with the Mutual Fund company. But then there is no one to help select the right fund. Or even help select which Mutual Fund company (Asset Management Company or AMC) to go for. There are some 30-40 AMCs and a few thousand funds/plans to choose from.
There are neutral platforms like MFU and CAMS but here too, the same problem of selection exists. Besides monitoring the investments requires effort too.
That leaves direct mutual fund platforms like Jama (and a few others). It is best to choose a platform that is easy to use, paperless, has high safety/security and is run by seasoned team of professionals.
The pricing model is also important. Some online platforms charge on a per transaction basis and have various other charges. Perhaps they have a high internal cost structure that needs to be passed on to the customers. Or they have investors demanding a higher return on their capital. If these two possibilities exist, then the longevity of the online platform is also suspect. When the objective is to avoid leaky buckets why choose a platform that has a high cost structure?
It is extremely important for any earning person to understand where his or her money goes after it reaches them. Naturally expenses and consumption is a big chunk, but the cost of holding the money and the cost of investing it needs to well and fully understood. With this in mind, the investor should research on which are the best avenues for direct mutual funds and then invest her hard earned savings into it.
Happy Investing !
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