Abhinav Angirish
founder ,Investonline.in
SEBI took a bold step by allowing investors to invest in mutual funds directly. This, in essence, means that investors do not need to invest through intermediaries. Presently investments through direct plan contribute around 10% of total mutual fund investments. A sneak peek in history reveals the irrationality of small investors when it comes to investing. Surprisingly even High Net-worth Individuals (HNIs) having access to resources prefer to invest directly in mutual funds, but it is limited to the debt category.
Investors are sensitive about expense ratios. Many look at expense ratios as the sole criteria to invest in mutual funds. Since the investor purchases the units directly from the fund, the expense ratio is lower. The fund house passes the savings in commission to the investor. But does this make a direct plan attractive? Let’s find out.
Every investment activity requires cost-benefit analysis and mutual funds are no different. The incremental returns might sound attractive. But in absolute terms the difference between the direct and regular plan is minimal. For debt funds the impact is negligible. Investors who want to invest in debt funds should continue to do so after seeking advice from a financial adviser. In equity segment, the savings amount to 0.5%. for a small investor who invests Rs 5000 every month through SIP, the switch from regular plan to direct plan would result in savings of Rs 25! Clearly, this is not worth the hassle. Besides a small investor does not have the expertise to analyze the pros and cons of a particular fund. Wrong investment can cost him dearly. If one evaluates the difference of returns between the best performing and worst-performing funds, the result is shocking. The worst performing fund underperformed by a whopping 35%.
A good financial adviser helps you to identify opportunities to generate decent returns. A smart investor wouldn’t chase paltry 0.5% return by switching over to a direct plan. Wrong investment can force you to marry a bad fund and result in wealth erosion. Even if you have a portfolio of Rs 1 crore, you save just Rs 50,000, and that too at the cost of expert advice.
The buck doesn’t stop here. Even if you manage to invest in a direct plan, you have a herculean task ahead. You have to manage the investments and keep a record of each transaction. This becomes tedious if you are investing through SIP. In the worst-case scenario, if something happens to you, your family will have to retrieve each record manually. Suppose you decide to store your investment records in your email. What would happen if your family members cannot retrieve the information for some reason? The entire purpose of goal planning is defeated. How many are aware that nearly Rs 21,000 crore is lying unclaimed in the financial system. The investor either forgot about the investment or his successors could not trace the investments after his death.
If you invest in a direct plan, you will have to take care of the documentation process. Every investment requires a separate set of documents whether you are investing through online or offline mode. If you are an active investor this could turn out to be a nightmare. Intermediaries provide valuable services. The investment process is hassle-free. They also provide consolidated records of all investments.
To sum it up, investment through a direct plan offers very little in terms of value. It increases the risk of bad investments and makes the entire investment process laborious. A small investor should invest through a financial adviser or intermediary to achieve his investment goals.
- Abhinav Angirish is founder, in
