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The Price of Ignorance

A large proportion of existing fund investors and almost all potential fund investors aren't even familiar with the basic idea of open-ended funds

I'd like to tell you about something I'd witnessed many, many years ago, when I was little more than a teenager. For some long-forgotten reason, I spent some time at the office of a computer education company that was little more than a shop in those day but eventually became one of the country's leading names in that business. In that company's office there used to be a bunch of career counsellors whose job it was to try and judge what potential students' capabilities were and guide them into taking the correct course. Of course, that was just the official story. The counsellors were actually expert saleswomen whose real job was to judge how much each students' parents were capable of paying and talk them into signing up for the most expensive course possible.

Readers of this magazine will immediately recognise the exact parallel with some of the 'financial advisors' who are giving guidance to investors about where to invest there money. The official story is that these advisors educate investors and then help them choose the best investments. In reality, the whole exercise is about getting investors to choose investments that will yield the maximum commissions to the advisors.

Yet, there are plenty of advisors out there who aren't doing this kind of a thing. These are investors who have realised, one way or another, that the only way to ensure that they make money long-term is to really think of putting their investors' interest first.

I firmly believe that a very large proportion of people who dabble in investments-stocks as well as mutual funds-do not have even a rudimentary idea of the basics. Because of my profession, I'm frequently approached by people (and with the markets booming, several times a day) who want some advice on fund investments.

As it happens, I often end up telling these people things that they find utterly amazing. For example, people are often amazed to discover that you can actually buy a fund any time, not just during its IPO (sorry, NFO). Many of these people are also stunned to find out that you can sell your investments back to the fund at the NAV and get back your money any time. And some of these are people who actually have fund investments, often in fund IPOs, sold to them by real-life, AMFI-certified, fund-accredited, 'financial advisors'.

I see a great disconnect here. Fund companies are launching ever more sophisticated products. Research companies like ours are using sophisticated techniques to dig into the performance characteristics of these sophisticated products. And all the time, a large proportion of existing fund investors and almost all potential fund investors aren't even familiar with the basic idea of open-ended funds, which have been the norm for almost a decade now.

I really don't know how this can be fixed. What I do know is that if this problem of investor education is fixed then it will eventually be an enormous boost to the businesses of fund companies and financial advisors. So perhaps, in the interest of making a lot more money in the long-term, one should expect them to make a serious effort to solve this problem.

I guess the same applies to us at Value Research too.