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During an investment webinar, a participant asked me an intriguing question, “Mutual Funds are great, but why would I still need a financial advisor?” It’s a valid question, and he made a compelling point.
Today, there’s no shortage of free online tools and calculators to assess risk appetite, set financial goals, determine the ideal SIP (Systematic Investment Plan) amount, and calculate the required investment duration.
But here’s the bigger question: Can these tools alone craft a personalized strategy that aligns perfectly with your unique financial aspirations?
On many digital platforms, data on mutual fund performance, the assets managed by the fund, and star ratings are easily accessible.
Additionally, in recent years, investing and selling mutual funds has become straightforward, mutual funds are indeed a good option, but is this enough to grow your wealth effectively?
The webinar participant pointed out that transactions have become simpler and more advanced. However, if a financial advisor is only helping clients with these basic aspects, then won’t they soon find themselves out of business?
With this in mind, I attempted to clarify the value of a good financial advisor to the webinar participant. I started discussing some data with him to highlight my point.
But here’s the real question: Isn’t it about more than just investments and transactions? Don’t you need expert guidance to navigate the complexities of your financial journey and build a strategy that aligns with your long-term goals?
Table Of Contents:
1. How is the income?
2. Advisor Alpha
3. The path to higher returns
4. The help of a financial advisor
5. Final Takeaway
How is the income?
I asked the webinar participant a crucial question: “Are you happy with the returns from your mutual fund investments?”
He hesitated briefly and then admitted he wasn’t satisfied. Over the past few years, his portfolio’s returns have been significantly lower than the Nifty 50 index’s performance.
Curious about why, I asked him if I could review his portfolio and transactions from the past years. He agreed right away. After analyzing the data, I discovered some interesting insights that explained the drop in his returns.
He had invested in solid mutual fund schemes, but the early returns were not replicated in recent years.
His annualized return gap was 3% to 5%. The main reason was that he had been buying and selling his fund units at the wrong times essentially, trading in mutual funds.
When the stock market dipped and headlines like “Investors’ wealth eroded by Rs. 5 lakh crore” appeared, he would panic and sell his units to exit the market.
This meant he was selling at a lower NAV. He missed opportunities to buy more units when the NAV was low. On some occasions, he even paused his SIP investments midway.
He had invested a large portion of his money when the stock market was at its peak, with valuations high. Naturally, his eagerness to buy was much stronger during those times.
But here’s the real question: Could his behavior be the reason for his underperformance? This isn’t just a personal issue.
According to Morningstar, there’s typically a 2.5% to 5% gap between a fund’s returns and the actual returns investors receive. This discrepancy is largely due to poor investor behavior. Isn’t it time to reassess our investment approach?
Advisor Alpha
This gap exists across all types of fund schemes with varying timeframes. Reducing this gap in returns is one of the key services a financial advisor provides to their clients. This is what is referred to as ‘Advisor Alpha’.
Advisor Alpha refers to the additional returns a financial advisor helps generate by guiding investors to make better decisions, especially in terms of timing and behavior.
But here’s the bigger question: Can this gap be bridged without the guidance of a skilled financial advisor?
Even during tough market phases, isn’t it the responsibility of financial advisors to ensure that investors are making the right asset allocation decisions?
When the stock market is experiencing a rally, how can advisors ensure that investor behavior doesn’t work against their returns? This is where financial advisors and mutual fund distributors need to be more proactive in guiding investors.
In mutual fund investments, alpha refers to the extra returns a fund generates beyond its benchmark index. This is precisely why so much focus is placed on the alpha provided by fund managers in the mutual fund industry.
So, the bigger question is: Can investors achieve optimal returns without the expertise and strategic guidance of a seasoned financial advisor?
The path to higher returns
For an investor, the most important factor is the higher returns generated by the fund. This is why they make investments in the first place. This is where advisors can truly add value.
In other words, the true role of a financial advisor is to manage the investor’s behavior and ensure they receive the full potential of returns from the schemes they invest in.
The help of a financial advisor
Finally, I asked my webinar participant, “Okay, now you know and understand what needs to be done, right?” He smiled and said, “I’ve struggled to manage my investment behavior many times, and now I’m ready to seek the help of a good financial advisor.”
He said this with a sense of relief.
And you? Aren’t you ready to take the next step as well?
Final Takeaway
- Advisor Alpha: A financial advisor can reduce the gap between a fund’s returns and the actual returns you receive, enhancing your overall investment outcome.
- Behavior Management: Financial Advisors help manage investor behavior, ensuring you stay aligned with your long-term goals and avoid reactive decisions.
- Beyond Tools: While digital tools can be helpful for assessing risk, setting goals, and calculating SIP amounts, they cannot replace the personalized strategy, behavioral management, and ongoing expert guidance that a skilled financial advisor provides.
- Strategic Guidance: With expert advice, investors can make the right asset allocation decisions, even in volatile markets, to maximize returns.
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