Review of Scripbox, Review of FundsIndia. Why Free isn’t Free

Finance For Beginners

This isn’t a review of Scripbox or a review of FundsIndia alone. But about every such mutual fund distribution platform out there. There are several. The problem with all such platforms, is three fold.

  1. These platforms are middlemen of sorts. Distributors in other words. And they get a cut of your wealth when you invest through them. This is in the form of commissions.
  2. Most users of these mutual fund investing websites don’t realize the presence of such commissions.
  3. And almost no users are aware of how these seemingly small commissions severely affect wealth in the long term.

So here’s a simple FAQ.

I’ve written it keeping beginners in mind. Feel free to skip the questions you think you already know the answers of.


What are commissions? And why the fuss?

Commissions are what are paid to a salesman upon a sale. It’s usually a percentage of the sale. It’s a kickback of sorts. Every industry has commissions. Without commissions, no one would have the incentive to to sell anything aggressively.

Since commissions are usually paid as a percentage, the more a salesman sells, the more he/she makes.


So what’s the problem with middlemen being paid commissions?

Sellers become greedy. And they often resort to mis-selling. And some spread mis-information.

If I’m a salesmen who has 3 products to sell, I’ll obviously try and sell the product which gives me the biggest commission; even if the product isn’t right for you. That’s clearly a conflict of interest right?

Let’s break that down.

  • If I’m a salesmen of Product A, which gives me pays me higher commissions than Product B, I’ll try my best to not educate you about Product B.
  • Similarly, if there is a Product C which pays me no commissions at all, I’ll try my best to never ever educate you about Product C, irrespective of how great it is for you. Because selling it to you does nothing for me.
  • If you specifically insist on Product C, I’ll simply mention all the downsides of Product C, with the hope that you decide against it.

In the far chance that I do declare that I make commissions on my sales, I’ll tell you that the commission is a very very small percentage. I’ll make it seem negligible, inconsequential.

‘It’s less than 1%!’

‘It’s just 1.2%. At max.’

These commissions only appear small. Because you’ll be surprised to know how much wealth they eat away.


Review of Scripbox; Review of FundsIndia (Contd.)

Do financial products have commissions as well?

Of course. Financial products especially are riddled with commissions. Harvard business school even did a study of the rampant mis-selling which happens in Indian financial space. A lot of highly educated Indians fall for mis-selling every year.

The problem of commissions is especially damaging when it comes to investing. Because it’s your hard earned wealth working for someone else, without your being aware.


So there are commissions in mutual funds too?

Yep. Why do you suppose a lot of such mutual fund websites allow you to use their services for free? They earn more in commissions, than what you’d ever be willing to pay them.

But nothing comes for free. If something’s free, it’s just wise for you to be suspicious of it.

But yes, mutual funds have commissions as well.


So is there a direct, no-commission way to invest in mutual funds?

Yes. Since 2013. Every mutual fund has a direct, commission-free variant. It’s called a Direct plan of mutual fund, or Direct mutual fund for short. It invests in exactly the same way. But it gives you much higher returns.

As a matter of fact, Direct funds far outperform their Regular counterparts year after year. And it just makes sense that you earn more from them, because mutual fund companies don’t have to pay commissions to middlemen on Direct plans.


Review of Scripbox; Review of FundsIndia (Contd.)

How do I know if my mutual fund investing site is working on commissions?

It’s mandatory for the industry to disclose commissions being paid to distributors. So, AMFI discloses these commissions every year.

Here’s a link to the list. If you find your financial advisor, financial educator or investing platform on that list, he she or it is certainly a middleman. Bear in mind that many of them could be registered with a name which is different from their brand name. But you’ll be able to find that information on their website.


I get it. But Scripbox and Fundsindia tell me it’s a very small percentage. So does it really matter?

Fair question.

Let’s look at the difference in 5 year returns of a Direct fund and a Regular(commission-based) fund, for some of the current equity mutual funds.

Direct Vs Regular - Scripbox Review 2

You can look these return numbers yourself online. All data is taken from VR.

Now assume you were investing 15,000/- every month for 15 years. Here’s the difference those small percentages would’ve made in each of those funds.

Direct Vs Regular - Scripbox Review 2

Pay attention to the last column in the table.

Those small percentages seem small still?

Now, I know of several individuals who invest more than 1Lac per month via SIPs into mutual funds. The amount of wealth lost to commissions for such individuals can easily run into crores.


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Review of Scripbox; Review of FundsIndia (Contd.)

But Scripbox and Fundsindia and other such sites help pick mutual funds. How can I know that information otherwise?

For one,

  1. Blindly going by such recommendation is a bad idea anyway. Why? Because without learning the fundamentals of equity and mutual funds, there’s a chance any recommendation could take you completely by surprise.
  2. No mutual fund consistently performs the best. Several fall from grace, several rise from the depths each year.
  3. An investment recommendation based on past returns of a fund doesn’t really work. Why? Equities just don’t behave that way. They will always be unpredictable. Most recommendation algorithms work on past performance data. And past performance provides no guarantees of future performance.

Secondly,

  1. It is now easier than ever to find a mutual fund which suits your goals. For example, a visit to ValueResearch and Morningstar is all it takes to see the top performing funds in any category. Click here to see how easy it is to do that.
  2. There are plenty of direct mutual fund sites which also provide such recommendations. Kuvera, Unovest, ETMoney, Zerodha Coin and others not only allow you to invest in direct mutual funds, but also provide such recommendations.
  3. All AMC’s native websites, and a consortium led portal like MFUOnline let you invest in Direct funds for free. And they’ll always be free.

Considering all this, how does it make sense to give away so much of your wealth to middlemen?

Losing such huge amounts of wealth, for a skill you can learn relatively easily, makes no sense at all. These platforms might scare you stating that DIY investing is bad, but that doesn’t mean the unpredictability of equities goes away if you do otherwise. You’ll have to learn about the fundamentals anyway.

If you want to learn the skill, you can pick up a good book on investing, or attend a workshop. Just ensure its not run by a middleman. And the easiest way to do that, is to check if they also educate about direct mutual funds and other commission-free products.

Review of Scripbox; Review of FundsIndia (Contd.)

The final take: Review of Scripbox, Review of FundsIndia

Should you use them to invest?

Closing remarks: Review of Scripbox, review of FundsIndia – and how much you lose by using them

The truth is that if you’d like your money to work for you, you need to wean yourself off commission-based products, and move to commission-free products. Even among mutual funds there are products like index funds and ETFs which reduce your overheads even more – but that topic’s for another day.

You’re first step is to realize the impact of commissions. Because the amount of wealth you could lose to them, is non-trivial. So spend a couple of months getting a good understanding of equities and mutual funds. Eventually, you’ll be able to pick and chose the right mutual funds yourself.

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Happy Moneyplanting.


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