Using Fintech Platform to invest in Mutual Funds? Watch out for these Risks Involved

September 24, 2021 Mutual Fund

Fintech refers to the technology-driven innovations occurring in the financial services industry. Mutual funds are one of the most popular investment avenues among investors, especially beginners. In the current uncertain phase of the COVID-19 pandemic, carrying out mutual fund transactions in the traditional way was difficult. However, a shift to digital platforms has made transacting in mutual funds convenient for investors.

With the increase in digitalization, various mutual fund apps or online investing platforms have been around for a while. However, the crisis due to the pandemic has made online investing popular among investors. Many investors nowadays especially millennials have been actively managing their investments through digital apps. Fintech investing platforms offer the ease and convenience of investing, managing, and tracking all their investments at one place.

Recently, my friend Samira called me and said, “Mitali, do you remember I told you about an app I was managing all my investments from, which also has a robo-advisor feature that recommends mutual fund schemes. I have been noticing that the funds in my portfolio are not performing well.”

“Also, while I was discussing with my other friends, they pointed out issues regarding data privacy on such apps. I thought I should just connect with you on the same and have a clear view about it.”

To which I responded, “Yes Samira, I do remember about the online investing app. Investing via online portals provide an edge with its transparency and ease of access to the progress of your investments at any given point. However, even if the online investing platform provides you with convenience, there are certain risks involved that you must be aware of.”

Samira replied, “I understand that there are market risks involved while investing in mutual funds, but what else apart from that? Could you please help me understand the risks involved while using any fintech platform for investment?”

Advancements in fintech related investments in various investment avenues can work wonders for your investment portfolio. However, it does not mean you should simply overlook the risks involved.

Just like, before investing into any financial instrument you need to ensure about your risk tolerance, investment horizon and financial goals. Similarly, you need to be cautious about the various risks that online investing through several fintech platforms possess.

Here, I have highlighted few points that you must be aware about while using fintech platforms to invest in mutual funds:

1. Financial data security

As you plan to invest in mutual funds via fintech platforms, you refer to various online investing apps and portals that provide you investment facilities. You would mostly prefer fintech platforms that offer you the convenience of several investment avenues under one roof. Although this ease of access towards investing your hard-earned money at your fingertips seems to be beneficial to you, it comes at a cost.

You are required to upload your personal and financially sensitive information on the portal or apps, for identification, verification and transaction purpose. While sharing this information, it is very important to be cautious about the data security level of that particular fintech platform. You must ensure that your data is secured and safe from hackers or system errors. You need to thoroughly understand the data security norms of such fintech platforms before you plan to invest online.

[Read: How to Safeguard Your Financial Information in this Fintech World]

2. Background check

Mutual fund investments through fintech platforms are gaining traction amongst investors. There has also been promotion and advertising for such apps on various media portals. This encourages the millennials — the tech-savvy generation — to invest online in mutual funds. Since most of the fintech platforms are currently owned by start-ups, which have not been around for long, there may be a possibility that some of them may close down or are acquired by bigger entities.

Here you need to simply do a background check of the fintech platform you wish to transact and manage your investments through. Do not follow the crowd or the hype behind any particular investment portal or apps. In order to avoid any complications with your investments ensure you evaluate the entity that owns the fintech platforms, their existence in the market, their past performance, and whether it is officially registered with the SEBI.

3. Robo-advisor recommendations

Fintech platforms provide investors with comprehensive set of tools to invest, manage and track their investments. There is a wide range of services offered by various apps such as goal-based investment, risk profiling, research reports, and automated investment advisory popularly known as robo-advisors.

You should look for a platform that meets your overall requirements. You may opt for a platform that provides you investment advisory services to select best mutual fund schemes for you. The online investing platforms use technology that runs complex algorithms to develop auto-customised portfolio allocation and investment recommendations suitable for investors, as per their risk profile.

The Robo-advisors work by asking a few simple questions to determine your goal and risk tolerance and then suggest investing your money in a highly diversified low-cost portfolio of worthy investments. However, some investing platforms or apps recommend schemes based only on past returns, which will not be indicative of future returns as well. Most of them are not backed by comprehensive research, which makes these fintech platforms less efficient.

In the above-mentioned case, the Robo-advisor of the fintech platform that my friend Samira invested through may have recommended schemes based only on past returns and not personalised it as per her requirement. Thus, her portfolio performance has been poor, as it didn’t recommend the best schemes suitable for her.

Robo-advisors can assist you to enhance your investment portfolio, as it is free of human errors and the turnaround time to provide you pointed recommendations is far quicker. You must ensure that it is backed by effective research based on qualitative and quantitative parameters and not just on the historical data.

4. Hidden charges

Many fintech companies offer online mutual fund investment platforms either for free or for a fee. Most of these platforms are registered with the SEBI, well regulated and governed by security and privacy guidelines as mandated by the SEBI. It may include certain fees such as subscription fee or registration fees for their services.

All this information related to the charges should be clearly mentioned upfront by the fintech platforms, as sometimes there are hidden charges involved, which you may not be aware of. You need to evaluate the charges related to registration, transaction or any other services provided by the platform.

Ideally, a fintech platform should ease out your hassle of investing in mutual funds. It should reduce the time and cost required in the traditional way of investing. It may also eliminate the need of a financial advisor with the help of Robo-advisory services that are backed by effective research.

After all, investing in worthy mutual fund schemes is the goal to enhance your portfolio performance and gain optimal returns. However, this will be possible only if the fintech platform you choose holds all the required elements and is backed by valuable research.

This article first appeared on PersonalFN here