He gives me a call when I am most busy and tries to lure me into every single scheme that hits the market.

Behind that friendly tone, there is a whole lot of information he is reluctant to disclose.

If your mutual fund agent is on the same trip, here are some things you can be sure he will not tell you:

• Why has my fund not declared a dividend?

1. "The fund I am selling is really expensive"

There is no free lunch in the financial world. The fund you are planning to invest in may be a really expensive proposition.

~ Loads

All funds charge fees known as entry and exit loads.

You pay this fee when you buy the units of a fund (enter) or when you sell the units of the fund (exit). It is a percentage of the total amount you invest or take out. You will be impacted by these two fees primarily.

~ Brokerage costs

This cost is incurred as funds buy and sell shares. This is not passed on to you but will be reflected in the Net Asset Value.

NAV is the price of a unit of a fund.

The brokerage is taken into account before declaring the NAV. The higher the brokerage, the lower the NAV.

~ Expense ratio

This figure covers all other administration and fund management expenses.

A fund can charge a maximum of 2.5% of its total assets (money and investments under its management).

~ IPO costs

If the fund you are buying is an Initial Public Offering (brand new fund), you might be saddled with paying the IPO costs.

The maximum that can be passed on is 6% of the total costs. This amount could be spaced out over five years.

• The best funds may not be the safest

2. "I don't care about your financial allocation"

If you already have substantial amounts invested in, say, fixed deposits and bonds, it makes sense to invest in an equity fund, where your money will be channelised into the shares of companies.

No matter how provocative a sector fund may sound, there is a catch. These funds invest only in companies of a particular sector, like infotech or pharma. While they can deliver phenomenal returns if the sector does well, they also come at a high risk. You could lose badly.

If you have already invested in shares, it may not make sense to invest in an equity-oriented fund. It may be better to invest in a debt fund (fund which invests in fixed return instruments like bonds).

But don't expect your fund agent to give you such advice.

He will just tell you why you need to put your money where his mouth is. And his mouth will be where the commissions are. Commissions are highest on equity funds and IPOs.

This explains the hardselling on that front.

• Why you should watch over your mutual fund

3. "The fund I am selling could be a real loser"

I once told my agent I was disappointed with the fund's performance.

He replied that none of the funds from that house were doing well.

When I asked him why he suggested it to me, he gave a vague answer, suggesting it was his 'duty' to inform me about all schemes, but his recommendations are not a guarantee.

The reason he did that was pretty simple.

Everyone has to earn a living. But you need to be careful when their interest conflicts with yours.

Agents get a commission of around 2% to 2.5% of the investments that they channelise into the fund. This is for equity funds. Brokerage for IPOs could go higher.

For debt funds (funds that invest in fixed income securities), the brokerage is lower.

Some Asset Management Companies (mutual fund houses) give great incentives, like free laptops or a trip abroad, if certain targets are met.

Often, his target (and the carrot being dangled to achieve it), is more important than you or your money.

• What you should know about fund IPOs

4. "The Rs 10 sales spiel is all crap"

Have you ever heard this line: "Go for the IPO, you will get it for Rs 10 per unit. If you buy the units of another fund, you will end up paying much more"?

While it is true, it may not put you in a better position.

Let's say a fund coming out with an IPO has its units going for Rs 10. Another fund has its units going for Rs 20.

Both have invested in the same companies in the same proportion. When share prices rise, NAVs will rise proportionately.

If both rise by 10%, Rs 10 will become Rs 11 and Rs 20 will become Rs 22.

A mutual fund unit gets its value from the shares it invests in. If other mutual funds have invested in the same shares, you get the same benefit.

That is why the type of companies the fund manager has invested in is important. Its price is not.

Do not be under the impression that a unit that costs Rs 10 will shoot up to Rs 50 overnight.

If the fund manager picks some lousy stocks or the stock market crashes soon after, the Rs 10 may just be worth Rs 8!

Illustration: Dominic Xavier