Exploring Mutual Fund Investing Through a Robo Advisor

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  • 03 Jan 2024
Exploring Mutual Fund Investing Through a Robo Advisor

A robo-advisor is a financial advisor powered by artificial intelligence that deploys specific algorithms to help you with your investments. Based on the input provided, such as the goal you wish to invest for, your risk tolerance, and investment horizon, robo advisors present to you the most prudent mutual fund investment option.

Advanced robo-advisors are also equipped to manage your mutual fund investment portfolio and provide relevant suggestions to maximize returns.

A robo advisor is just more than a transaction platform. It takes care of every aspect of your investment, from suggesting a fund to tracking its performance and making relevant suggestions as per your changing life goals. Some of the advantages you get while investing through robo advisors are:

1. Low Cost

Robo advisory is generally more cost-effective than traditional financial advisors. As there’s no human interaction, they are pretty cost-effective. If you are a long-term investor, using the services of a robo advisor to invest in mutual funds can help you save significantly. The low fees translate into amplified profits at the end.

2. Free from Bias

Biases in investment can hurt your goals. Thankfully, robo-advisors are less likely to suffer from bias as no human suggests investment options. Humans are more prone to suggesting biased options driven by the lure to earn fat commissions.

There are ample instances of mis-selling where the primary aim was not to suggest funds aligning with investors’ needs but to earn hefty fees as commissions. As data, facts, and statistics drive computer algorithms, they are more likely to offer logical suggestions.

3. 24X7 Availability

This is another significant advantage you get with robo advisory. There’s a limitation of human availability. However, there are no such issues with robo-advisory. As they are machine-driven computer algorithms, they are at your service 24X7.

You can ask them a question anytime, and it will present you with a solution. To put it otherwise, there is no time limitation with robo advisors. You can invest, track, and monitor your investment round the clock, 365 days a year.

With robo-advisors providing the aforementioned benefits, questions have been raised on the viability of human advisors. While robo-advisory has its own set of benefits, they have certain drawbacks. These include:-

1. Guidance During Difficult Times

Mutual funds are market-linked products. Their performance depends on several internal and external market forces. When the ride is smooth, everything seems alright. However, during tough times, human intervention becomes all the more important. Investors often act under impulse when markets undergo bearish phases. They tend to exit their investments, thus converting notional losses into actual ones.

This is when you need the expertise of an experienced financial advisor who will aid you calm your nerves. Historically, markets have rewarded those who have adopted a long-term approach to mutual fund investing.

2. High Level of Customization

Though robo advisory can offer customization based on your inputs, it may not be apt. Human financial advisors are better equipped to understand your situation and provide highly customized solutions. Also, investment needs change at different life stages. For example, when you are a single young earner, you may have a higher risk appetite that prompts a high dose of equities.

On the other hand, as your responsibilities increase and you inch closer to retirement, your risk tolerance generally tends to reduce. In that case, your mutual fund investment will have more tilt towards debt. This deft customization is often lacking in robo advisory.

Summing it Up

While robo-advisory can be a prudent option to get started, it’s better to consult with a human advisor for more sophisticated investments. A blend of both can help you get the best out of your mutual fund investment.

FAQs on Exploring Mutual Fund Investing Through a Robo Advisor

Well, it depends. Robo advisors may be good to start initially, but at some point, you will need the intervention of a human advisor, particularly during testing times.

While robo-advisors are quite effective, they may not be effective while making complex investment decisions. If cost is the factor in your mind, robo-advisors are probably more effective.

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