Imagine one scenario. A 27-year-old marketing professional from Mumbai learned about the power of compounding of Systematic Investment Plans (SIPs). He wanted long-term exposure to equities through mutual funds. Like many first-timers, he went to a bank to set up an SIP in a direct mutual fund scheme to achieve the same. Instead, his bank relationship manager convinced him to buy a special plan that promised \u201cassured returns\u201d with market upside. Weeks later, he discovered that he had been sold a regular mutual fund plan with hidden commissions, not the direct plan he originally asked for.<\/p>\n
This is how mis-selling of a mutual fund happens, and it is not an isolated story. Many investors, especially beginners, fall into similar traps. To avoid ending up in the same boat, it\u2019s crucial to learn about mis-selling<\/span><\/a>,<\/span> how to spot it early, and where you report it. Here we go!<\/p>\n Mis-selling of a mutual fund happens when you are offered a mutual fund scheme that isn\u2019t aligned with your actual financial needs: financial goals and risk appetite. You may want high returns, but what you truly need is stability. You may want quick results, but your goals may require long-term planning. Mis-selling happens when someone takes advantage of that gap and puts your financial well-being at risk.<\/p>\n A simple analogy would be this. You walk into a clothing store looking for a cotton t-shirt for casual wear. The salesperson convinces you to buy a designer jacket instead, which is expensive and impractical for daily use. It won\u2019t serve your actual purpose, but you walk out thinking you got a great deal.<\/p>\n It\u2019s a little sales trick, with mis-selling of mutual funds being a more polished version of the same trick. You walk in with trust, expecting the right advice, but instead, the seller\u2019s commission-driven interests overshadow the investor\u2019s interests.<\/p>\n Before we get into how to identify mis-selling, it helps to know who\u2019s responsible for protecting investors like you.<\/p>\n In India, the Securities and Exchange Board of India (SEBI) regulates the mutual fund industry. Every asset management company (AMC), mutual fund distributor (MFD), financial advisors, and banks selling mutual fund schemes must comply with SEBI\u2019s rule. SEBI\u2019s role is to protect investors\u2019 interests and ensure fair practices across the industry.<\/p>\n Also read: <\/span>Why Should You Only Work with a SEBI Registered Investment Advisor?<\/span><\/a><\/p>\n You have got the basics. Let\u2019s look at how you can spot the warning signs early and avoid being mis-led.<\/p>\n 1. Unauthorised switch transactions<\/strong><\/p>\n Unauthorised switch transactions happen when your investment is moved from one mutual fund scheme to another without your clear consent or knowledge. This is often done by intermediaries like mutual fund distributors or bank relationship managers.<\/p>\n What is the reason behind this? Akhil Rathi, Head – Financial Advisory at 1 Finance and a SEBI Registered Investment Adviser (RIA) said,<\/p>\n \u201cMutual Fund Distributors (MFDs) earn trail commissions from Asset Management Companies (AMCs) based on the assets they mobilise and continue to manage, and their income can rise when clients\u2019 investments are shifted into schemes that carry higher payout structures. A frequent pattern is observed during the launch of new fund offers (NFOs), where distributors often highlight the potential growth story or unique positioning of the scheme to persuade investors to move money from existing funds, even though the long-term benefits may be uncertain.<\/em>\u201d<\/p>\n He added, \u201cWhile this practice helps increase distributor earnings, it does not always align with the client\u2019s best interests. Unlike Registered Investment Advisers (RIAs), who are required to maintain detailed documentation of their advice, justify suitability, and obtain explicit client approval before making portfolio changes, MFDs function under lighter compliance rules, making such switches easier to implement without comprehensive justification or prior authorisation<\/em>.\u201d<\/p>\n Let\u2019s imagine you invested in a debt mutual fund, aiming for stable and\u00a0low-risk<\/span><\/a> returns.<\/span> A few months later, while checking your account statement, you notice your money was transferred into an equity fund without your approval. This is an unauthorized switch transaction.<\/p>\n How to protect from unauthorised switch transactions in mutual funds<\/p>\n 2. Giving misleading information about a mutual fund scheme<\/strong><\/p>\n When someone spins the facts or straightaway twists the truth about a scheme, that\u2019s the process of providing misleading or falsifying information to investors. This involves exaggerating benefits or downplaying risks to make that scheme look better than it really is.<\/p>\n Your agent will reassure you about a specific scheme, emphasizing its risk-free nature due to the investment in large-cap stocks. Large-cap stocks (aka blue chip companies) can take a hit during volatile markets too. Calling them \u201crisk-free\u201d is misleading.<\/p>\n How to protect yourself from this:<\/p>\n 3. Hiding important details about the mutual fund scheme<\/strong><\/p>\n When the key information about the fund gets swept under the rug, that\u2019s concealing. Details like high fees, associated risks, or surrender charges may stop you from investing or make you think twice. In the end, this concealment can cost you more money or leave you stuck when you want to exit.<\/p>\n An agent might highlight the returns but completely ignore the exit load or high fund management fees involved. These hidden costs can eat into your returns or restrict your flexibility.<\/p>\n How to protect yourself from the trap<\/p>\n 4. Pushing unsuitable mutual fund scheme<\/strong><\/p>\n This happens when investors are encouraged or pushed aggressively to <\/span>buy mutual funds<\/span><\/a> that don\u2019t match their financial goals, risk tolerance, or life stage. Imagine if you are being sold a winter coat in summer. Will that work? The case is similar to mutual funds.<\/p>\n Senior citizens, who usually prefer low-risk investments, get pushed into high-risk small-cap or mid-cap funds that can swing wildly. These poor matches can cause financial losses and unwanted stress.<\/p>\n How to protect from product unsuitability?<\/p>\n 5. Switching from the existing fund to NFO<\/strong><\/p>\n Mis-selling here happens as investors are persuaded into exiting their existing, suitable mutual fund scheme to a seemingly lucrative new fund offer (NFO), often due to high commissions or sales targets tied to NFOs. You are exposed to unnecessary risk of underperformance, as there\u2019s no historical track record of that scheme. Plus, this increases MFDs\u2019 income that they earn through trail commissions.<\/p>\n For example, you are abandoning your reliable, well-functioning car for a new, shiny one, without a slightest idea about how the new car will perform. There\u2019s a risk here!<\/p>\n How to protect yourself from this?<\/p>\n 6. Selling too many schemes in the portfolio<\/strong><\/p>\n Holding a long list of funds increases overlap and dilutes the asset\u2019s potential. This further increases the overall costs (adding up all expense ratios), including taxation when you realize the gains. From MFD\u2019s perspective, when investors add multiple schemes, they see higher assets under management (AUM), meaning higher commissions.<\/p>\n For example, if your portfolio already has a diversified mixture of an equity fund, debt fund, and some exposure to gold, then adding a multi asset allocation fund (MAAF) is just redundant<\/a>. You are only \u201cover-diversifying\u201d the already well-diversified portfolio!<\/p>\n 1 Finance has made a documentary highlighting the rampant mis-selling of financial products and its impact on our lives. Watch it here.<\/strong><\/p>\nWhat is mis-selling of a mutual fund?<\/h2>\n
Who regulates mutual funds in India?<\/h2>\n
How to identify mis-selling of a mutual fund scheme<\/h2>\n
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