26 Oct Mutual Fund Direct Plans – Are you Ready?
Mutual Fund Direct Schemes are a hot topic of discussion these days on every forum you visit. The prospect of saving on commissions is seductive; and so, everyone wants to invest in Direct Plans.
Domain Leaders and Financial Advisors seem enthusiastic too. They believe that Mutual Funds of this day and age should permit great ease with streamlined KYC and technology-enabled fund services.
SEBI (Securities and Exchange Board of India) had actually asked Mutual Funds to offer direct services way back in 2012. The thought was that the well-informed investor could acquire these plans directly from Mutual Funds directly, and save in commissions paid to intermediaries. This saving of commission, reinvested over a long period of time, would add to the original corpus as extra return.
Look at the difference between the expense ratios between direct and regular plans of the same Mutual Fund. You will discover the direct plans have lower expense ratios; and this is because of saving accrued on expenses such as commission, promotion, marketing, etc. To illustrate, the regular plan of of ICICI Prudential Value Discovery Fund has an expense ratio of 2.25% compared to 0.99% in the direct plan. ICICI Prudential Value Discovery Fund’s has reverted with 32.6% over three years, compared with 31.27% of the regular plan. The difference in returns or the expense ratios may seem tiny to most people. But a small sum reinvested over long-term can produce extraordinary returns. This is because of what is known as the ‘Power of Compounding’. The example is that if you invest Rs. 100 per month at an interest rate of 15% for the next 20 years, then at the end of this period, you will have a corpus of Rs. 1.5 Lacs. It’s fascinating – this ‘Power of Compounding’.
So, are you ready to invest in Direct Mutual Funds? You would benefit immensely. And yet, the downside is that not every investor is cut out for the task, because, to benefit from investing, you should be possessed of a particular “attitude”. Not all have it. To succeed here, you need to be extremely disciplined and you need to invest with clockwork regularity. You must never take your money out because that’s what investors invariably do when their nerves crack during a market crash. You cannot salivate with greed when the market is doing well. If you cannot control these instincts, you need a disciplining entity, such as a Financial Advisor.
Self control in fiscal matters is hard, especially for someone who has little or no knowledge in Mutual Funds. Ideally, an investor should have that knowledge; in fact enough to be able to choose a fund and invest in it. The investor should monitor the fund and review fund-portfolio at least once a year. The investor should be able to work out how the fund is performing; and if it isn’t, the reasons for its under-performance. If the investor isn’t happy with the fund, he or she should have the wherewithal to get rid of it.
People who are technologically-savvy can go in for direct funds – because they know how to conduct online transactions and can easily navigate through the finer points of online banking. Advisors don’t touch investors with small corpus’ to invest; which is why the investor might as well go the whole hog and do it himself.
If you think that you have the knowledge, perseverance, discipline and patience to go in for direct funds, you should do so by all means and reap greater rewards. However, if you feel that you are better off with a regular Mutual Fund Scheme/Plan with an Advisor taking care of your investments and guiding you all for a small fee, then well, then, again, that’s the best way for you. In short, do what you are comfortable in doing. And if you are a first time investor, then you should, as a rule, go in for a regular plan.