BackOpinion | Are direct plans of MFs for you or should you rely on advisors?
Data from the mutual fund industry shows that investors who sign up for SIPs using direct plans are more likely to quit the investment earlySunita Abraham asks experts how investors can make the most of direct plans without harming their financial security
PremiumIn the search for lower costs, are investors harming their financial security by going for direct plans and depriving themselves of the services of an advisor who can handhold them in tough times? Data from the mutual fund industry shows that investors who sign up for SIPs using direct plans are more likely to quit the investment early. These investors seem more likely to react to short-term events and pull out funds in the absence of an advisor who can help them understand the implications.
Sunita Abraham asks experts how investors can make the most of direct plans without harming their financial security
Suitable for simple, standardised products
Rajeev Thakkar, Chief investment officer and director, PPFAS Mutual Fund
The answer to this question draws intense passions from both the supporters and opponents of direct plans. The truth, of course, is nuanced. It is not that the situation before direct plans was perfect and it is not that the situation post direct plans is perfect.
In the absence of direct plans, one hears anecdotally that large investors would get pass backs from distributors which is illegal and non-transparent. Introduction of direct plans and transparent commission structures has largely shifted corporate and HNI money to direct plans and they pay a separate advisory fee which is good. Even for sophisticated and knowledgeable investors, direct plans may be fine. For a standardised simple product like a liquid fund, direct plans may not pose problems.
However, the problem arises where investors mis-buy funds due to lack of knowledge and are lured by just the lower expense ratio. There is tremendous resistance to pay for good advice. Buying funds on trailing 1-year or 3-year returns without proper understanding and asset allocation based on needs, goals and risk appetite is a recipe for disaster.
Direct plans are only for those who know what they are doing.
It is better to pay fees to advisors than losing capital
V. Ramesh, Managing director and chief executive officer, MF Utilities
The answer is not a straight yes. To enable an investor to invest and manage mutual funds directly, it is mandatory that the investor has necessary knowledge and understanding of capital markets and also has the ability to analyse the performance of the schemes. Above all, they need to allocate time to do these activities. Those who have these abilities, will be able to handle investing directly well.
Having said this, there are many investors, who are caught by the tag line “cheaper plan". And such customers do get into such situations. It is like driving a car. If you do not have the necessary skills to drive a car, you must have a driver or hire a car. Partial knowledge will not help you reach the destination when you start driving yourself. Above all, it is dangerous.
Unfortunately, there are many investors who fall for the “low cost" branding and end up getting their fingers burnt. It is important, in my view, that investors take professional help through advisors to analyse their risk appetite and also identify the appropriate product for investment.
It could be either a distributor or a registered investment advisor. It is better to spend a little extra on commission than losing your capital.
Advisors help investors formulate the right plan
Dhruv Mehta, President, Foundation of Independent Financial Advisors
When it comes to investing, people can be their own worst enemy. Nearly all of the mistakes made by investors can be attributed to their behaviour which is typically dictated by fear and greed and which is why most investors don’t achieve financial security.
It is only with the help of an advisor than an investor will be able to formulate the appropriate plan to achieve his financial goals. And a saving of 1% in direct plans is more than offset by the immense value that an investor receives over the lifetime investment journey.
Currently, many advertisements focus only on saving cost in direct plans of mutual funds but don’t highlight the disadvantages, thus misleading investors. Direct plans are only for the very few who are informed and knowledgeable investors, and who can manage their investment behaviour. All investors need a lot of hand holding in their journey for achieving their financial goals in today’s complex and volatile financial markets.
Would you advise anyone to go for self medication and save the cost of visiting a doctor and use his services? Direct investing is as harmful as is self medication without a doctor’s advice.
Don’t think about cost of product at the start of planning
Aashish P. Somaiyya, Managing director & CEO, Motilal Oswal Asset Management
Mutual fund investors can be self-directed and avail of direct plans, buy direct plans and pay for advice or buy a regular plan using the services of a distributor.
The model an investor chooses to go for would depend on the level of understanding that the investor has about defining financial goals, and understanding the asset classes and products.
In any investment planning exercise, the actual product meant to execute the plan actually comes last. Investors who find themselves capable of doing this exercise on their own should go ahead and invest in direct plans of mutual funds.
However, if the starting point of the exercise is going to be which is the cheapest product in the market, then a lot of us are likely to end up with the wrong product for wrong criteria like past performance or a hot theme or a new fund offer available in the market at ₹10. Buying the wrong product for the wrong reasons and then comparing the costs is like feeling happy with the speed despite being on the wrong train.
Investors should focus on getting the direction and the vehicle right, and realise that the toll is incidental.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
