The arsonist and the fireman can never be the best of friends; one unleashes chaos while the other restores order. Theirs is a relationship based on mutual distrust. The analogy seems far-stretched and forced when we examine the association between the intermediary and the investor. The former supports, and often counsels the latter; the latter, however, needs constant assurance that the former goes about conducting his business in a transparent, methodical and ethical manner.

Today’s story, beginning with the kind of caveat that you have just read, is necessitated by what we are all witnessing these days: a runaway market, marked by copious quantities of liquidity, advancing asset prices, superior gains. Also, like night follows day, we have aggressive practices prompted by a section of intermediaries determined to play musical chair. And keep playing till the music stops.

The scenario is best explained in the context of mutual funds, especially with so many NFOs (new fund offers) entering the investors’ mind-space. The latter, already jammed with competing funds — a number of me-too products included — must lead the investor to the right choices. Selecting the most appropriate fund is a challenging task, which must be undertaken on the basis of one’s risk profile and other critical factors.

Helping an investor choose well is a job designed specifically for the intermediary. The latter’s role is different from that of a mere service provider. He is an entity who must execute a special function: help his client identify the most suitable products, and in turn, reject the ones that do not fit the bill.

Ask and task

An ideal intermediary has a lot to deliver to his clients. His deliverables (in terms of counselling) can range from a simple list of do’s to a more complex list of don’ts. Investors are by and large familiar with these points, but for the sake of repetition, here are some of the common ones.

A counsellor at all times needs to remind clients that the past performance of a product is not indicative of its future performance. This is an evergreen classic; however, it rarely goes out of fashion. Not when market conditions are so very bullish and hordes of buoyant investors are tempted to allocate more. Here, I am exclusively referring to equities, and specifically to mutual funds.

Clients should also be given a number of add-on messages. For instance, they should be told that an NFO with the issue price of Rs 10 is not always a smarter choice than an existing fund. A fund with a lower NAV (net asset value) need not compulsorily be a better acquisition than one with a higher NAV. Naturally, even an otherwise staid NAV can fluctuate violently in changing market conditions.

There are no guarantees in the real world of securities; market-driven asset classes do not assure any sort of performance. However, irrational promises are constantly made by unlawful and malefic quarters and ordinary investors tend to get influenced by their assurances.

These days a constant barrage of unauthentic news impacts the market, and some sections of the media tend to get carried away by “market rumours”. A responsible counsellor always guides his clients and helps him overcome such challenges.

A discerning client should be aware that an intermediary who suggests a product should disclose his interest (or position) in it. In the case of a typical mutual fund distributor, a client can well seek a list of fees or charges. Ditto, for an insurance marketer who “pushes” a product.

A participant should also ensure that transactions are all done properly (with an account payee cheque or a draft, perhaps). Exit loads or similar charges, if any, should be charged in line with the terms outlined in the offer documents.

Well-conceived grievance redressal mechanisms have been put in place by regulatory agencies. So, an investor who has grievances and doubts is free to contact the compliance official or the investor relations functionary who carries a specific mandate. In the contemporary online space, it is quite easy for an investor to contact the authorities too.

Investor complaints against fund houses, insurers, securities brokers, portfolio managers and the like, if any, can be taken up within the confines of prescribed mechanisms. An investor who is familiar with online tools can keep an eye on the websites of asset managers and the other outfits; he may also make himself conversant with organisations like the Association of Mutual Funds in India (Amfi), the industry body formed by asset management companies.

Some don’ts

In a market as robust as this, it is important that investors retain their composure and act rationally. In this context, do remember the following:

• It is dangerous to invest with money borrowed recklessly; mindless leveraging has its perils
• Promises, even if these are implicit in nature, should be probed; investing on the basis of such assurances is the mark of a gullible investor — it may later actually appear foolish
• The same applies to incentives or similar offers; there have been many cases where reckless intermediaries have worked out incentive schemes
• It is wrong to wilfully provide false information in applications, statements, declarations. For the sake of transparency and governance, it is wrong to indulge in such practices

The writer is director, Wishlist Capital Advisors