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Thus, cheaper results in higher returns. How much are direct fund returns higher? A small amount a year, but with compounds over the years, this accumulates. Does this mean that direct funds should be an automatic choice for all investors? Not enough. The yield differential of 1% per year between direct and regular plans is money, but maybe not too much. One could think of the money paid for the services of the distributor because that is exactly what it is. The unthinking reaction of always opting for the cheapest option may not serve many investors well.
All that a mutual fund does for you is paid for by the money that is deducted from your investments. For equity funds, fund companies may charge slabs from a maximum of 2.5% to a minimum of 1.75%. There is also the GST and all of this can push up spending to just under 3%. While the rate is expressed on an annual basis, the money is deducted daily in small amounts, so that it adds up to the total amount.
This money goes to the fund company, some of which eventually goes to the fund dealer. While it is certainly arguable that mutual funds charge too much, the deduction is equal for all investors in a given fund.
To understand the choice between direct investment and regular investment, let us first see what is the ideal role of an advisor. In a list created by a former US financial firm, here's what an advisor should do: build trust or credibility; goal planning, portfolio construction, portfolio rebalancing, ongoing goal planning and risk adjustment, and just as important as anything else, to be a counselor when the market is down.
Although this seems like a big problem, most investors need a subset of these services. Beginning investors also need someone to start them. A mutual fund investment is not just an automatic extension of some services you already get. Being too focused on cost can mean that you have never really started.
On the basis of all this, what type of investor would be suitable for direct investment? It should be somebody who understands what kind of mutual funds are needed for different types of investment needs, is able to do research independently and can establish a list of funds in which to invest, then go through the investment process. without help.
After starting to invest, whenever markets fall and investment values are under pressure, an external source of advice can help keep things on track. Essentially, do for yourself everything that an advisor is supposed to do.
Does it look like you? If that's the case, then you could definitely earn additional returns by investing directly. But if you are something that looks like a new and inexperienced investor, then you can be better off with a regular plan. Of course, this brings us to the question of whether it's easy to find the right kind of advisor, but it's a whole different story.
Dhirendra Kumar is the founder and CEO of Value Research.
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