Twitter
Advertisement

Returns alone shouldn't drive direct investment in MFs

Merit of the scheme for investing should be given priority over the minor saving via direct investing recommend experts

Latest News
article-main
FacebookTwitterWhatsappLinkedin

A Mumbai-based business man had been investing in mutual funds through a distributor until regulator Securities and Exchange Board of India (Sebi) directed fund houses to introduce a new category of direct plans under each equity scheme that was on the platter.

Thanks to the direct channel of investing he had piled up 50 new mutual fund scheme names to his initial portfolio, most of which was redeemed the moment mutual fund houses started offering these direct plans, under which an investor willing to park money sans middlemen can save up on the costs related to the distributor's commission, since January 2013.

Two-and-a-half years after the Sebi move, 12% of individual assets found their way through the direct channel, as per the statistics shared by Association of Mutual Funds in India (Amfi) as on March 31, 2015.

The benefit to the individual investor is evident if one looks at the returns of 380-odd equity-oriented mutual fund schemes. About 30 mutual fund schemes have been able to garner 2% higher returns under the direct plans as compared to the regular plans of the same scheme over a one-year period. The average difference in returns between the two plans is 1.08% over one-year and 0.81% over two-year periods, the highest difference being 3.50% over one-year period and 2.06% over two-year period.

The direct way to invest doesn't eradicate the charges completely. As far as the fund house is concerned apart from the distributor expenses, other costs such as fund management fee, marketing expenses, etc. have to be incurred. Under the direct channel only the distributor commission is saved, other expenses need to be borne by the investor annually.

Yet, investors are opting for the direct plans. Suresh Sadgopan, founder, Ladder7 Financial Advisories, "There are select financially savvy clients who are opting for direct plans even as they are aware of the pains involved, while others are of the view that everywhere they are paying a charge so wouldn't mind giving up on 0.5-1% for the convenience of investing."

However, he says in the race to earn 0.8-2% higher returns by opting for direct plans one must not delay the investment due to paucity of time for investing on their own. Sadagopan suggests, "There is no point in keeping the funds idle in a bank account. The time in market will be far more remunerative."

Financial advisor Hemant Rustagi, CEO of Wiseinvest Advisors, says, "It makes sense, to be in the right fund that has been offering consistent returns and meets other merits of investing and it just because it offers 0.5-1% additional by going the direct way. At the end of investing one also need to rebalance the portfolio both asset-wise and within the asset class based on the performance of the investments."

"It is easy to make money for anyone when the markets are on a bull ride. It will work well for sometime, till you see choppy market. Can you do that on your own when the markets are volatile? In the lure of 0.75-1% additional by way going direct, you don't want to end up losing 5-25% for being in the wrong fund," Rustagi adds.

The reason of difference in the returns could also be if the assets held by a fund are low.

When it comes to the difference in returns between 2.5% and 3.5%, the fund size plays a major role, points Rustagi.

Echoing Rustagi's thoughts, Surajit Misra, executive vice-president & national head – MFs at Bajaj Capital says, "Lower the fund size, higher is the total expense ratio. Most index funds have low asset size, barring a couple of funds. The expense ratio of index funds is very high and hence the higher difference between regular versus direct plan returns. So, the difference between the returns of the two plans won't be high for bigger fund sizes."

The charges that a fund can levy are capped based on the amount held in a scheme. The fund can charge 2.50% for the first Rs 100 crore of assets under management, 2.25% for next Rs 300 crore and 2% for the next Rs 300 crore, while funds managing more than Rs 700 crore can charge 1.75%.

"Instead of piling up on number of schemes, investors should select few schemes, which can help them achieve most goals," Misra recommends.

Find your daily dose of news & explainers in your WhatsApp. Stay updated, Stay informed-  Follow DNA on WhatsApp.
Advertisement

Live tv

Advertisement
Advertisement