Should you go for direct plans in 2017?
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Costs matter. Investing also costs, but the aim here is to maximise returns and yet minimise the costs. To some extent, this has been made possible if you have been investing in mutual funds. The capital market regulator, Securities and Exchange Board of India (Sebi), has mandated that all mutual funds must have direct plans.
Every mutual fund scheme comes with a cost that is embedded in its net asset value. Equity funds can charge a maximum of 2.5% of weekly average net assets and debt funds can charge a maximum of 2.25%. Among others, this consists of management fee that your fund house collects, sales and marketing fees, registrar charges, and distributor fees. A direct plan doesn’t have distributor fees as you bypass the distributor and buy it directly from the fund house. Let’s look at how much it can help you save.
Let’s assume that your equity fund charges 2.29% in its regular plan and 1.49% in a direct plan. Back of the envelope calculations show that an investment of Rs10 lakh made in a direct plan for a period of 20 years gives you back Rs1.26 crore as opposed to Rs1.09 crore in a regular plan, assuming your fund grows at 15% over this period. That’s a difference of Rs17 lakh. You could have quite a few foreign holidays with that kind of saving. According to Value Research, the average expense ratio of equity funds’ direct plans is 1.39%, and the same for regular plans is 2.21%.
Finding direct plans
You could invest in a direct plan through multiple sources. You can either submit your application form at your fund house’s office or at its registrar and transfer agent’s office. You could even buy direct plans on the Mutual Funds Utility (MFU) portal, sponsored by the Association of Mutual Funds of India (Amfi; the mutual fund industry’s trade body). There are a few other online portals, such as Invezta (by Valuefy Solutions Pvt. Ltd) and Oro Wealth (by Alpha Fintech Pvt. Ltd), which also offer direct plans. Such online portals run by private firms are actually robo advisors that do your financial planning for a fee. You then get to invest in direct plans of mutual funds they recommend. But if you don’t wish to avail of their financial planning services and just wish to invest in direct plans, there is a nominal fee either per year or per transaction. Effective 2016, you can also invest in direct plans if you are serviced by a Sebi-registered investment adviser (RIA). It works like this: your RIA advises and guides you on how to manage your money box, where and how you should invest and so on.
Based on her advice (for which she will charge you), you invest in mutual funds,through direct plans. Your adviser applies to mutual funds to get an access to your investments so she can keep a track of your investments, prepare monthly or quarterly statements and update you of your status. Only the planner with authorized access can do so; not any other planner or distributor. Ever since direct plans were introduced in 2013, they have grown surely and steadily.
Prime MF database shows that about 7% of equity funds’ assets (of retail investors) belonged to direct plans at end-December 2016, up from 2.84% at end-April 2014.
What should you do?
Don’t seek direct plans only for savings, said Suresh Sadagopan, founder, Ladder7 Financial Advisories. “Investors should, ideally, go to advisers who can give conflict-free advice (advise without regard to their commission), and then invest in direct plans,” he said.
Sharad Singh, co-founder and chief executive officer, Valuefy Solutions, which runs Invezta, one of India’s largest robo-advisors, and which also offers direct plans, said, “The expert investor may invest in direct plans on her own entirely, but the majority of investors, who actually need advice, should look at direct plans as ‘direct + advice’.”
So, be smart and careful. If you wish to go direct, make sure you have an adviser to help you. It’s okay to pay your adviser her fee since she spends time with you making and maintaining your money box. Your savings, then, come by way of direct plans that charge you less than regular plans.