Why the time of do-it-yourself investing might just have arrived

Over a five-year period, a little over one in four regular schemes managed to beat or meet their benchmark returns. Over a three-year period, around one in three regular schemes did so. In a regular scheme, investors use a distributor/agent to invest. These middlemen can be banks, brokerages and individuals.

In fact, one doesn’t have to invest through a distributor. MFs offer the option of direct investment where no commission needs to be paid to middlemen, leading to lower expenses in running the scheme and ensuring higher returns in comparison to investing through the regular route.

Hence, more direct MF schemes beat their benchmark returns than regular ones. Over a 10-year period, nearly two in three schemes met or beat their benchmark returns. Over three-years and five-years, this proportion was at around 48% and 45%, respectively.

Given this—while most MFs charge for expertise—they really don’t deliver that expertise when we look at their performance. There can be multiple reasons. MF schemes have sectoral level limits while making investments. There are expenses involved in running the scheme and rebalancing it due to daily investments and redemptions.

Also, the number of MFs and their schemes has exploded over the years. This increased competition has probably led to the markets turning more efficient, making it harder for fund managers to generate market-beating returns.

But these reasons still don’t justify their below-average returns. What this broadly tells us is that the fund management business is largely talk—where fund managers are more interested in driving up the amount of money coming into their schemes—rather than managing that money well.

Also, this has other repercussions. When actively run MF schemes aren’t delivering on their promise of generating market-beating returns, an investor is better-off investing in exchange traded funds or index MFs. Index funds are essentially MFs which mimic an index. So, a Nifty 50 index fund is expected to buy and hold stocks that constitute the Nifty 50 index, in the same proportion as in the index.

Given that there is no active management involved, the expenses of index funds tend to be lower and they end up generating returns which are similar but slightly lower than the broader market (because there are expenses). Also, one doesn’t take on the risk of not knowing whether a particular scheme will beat its benchmark or not.

Indeed, investors might now be better-off managing money themselves than going to chartered accountants, financial planners, wealth managers at banks, registered investment advisors, MF and insurance agents, social media finfluencers, and so on. In any such relationship, the phenomenon of asymmetric information is at play. The investment professional typically knows more than investors and can take them for a ride. This is something that has happened in the past: be it bank wealth managers, agents or social media influencers or even financial planners.

The only way to make sure that you as an investor aren’t taken for a ride is to have some knowledge of personal finance. And if that is the case, you might as well manage your money than go to an investment professional.

In the era gone by, one needed an investment professional for the simple reason that doing the necessary paperwork to invest was a pain. Now things can be handled digitally. Fixed deposits can be made and broken online. Stocks and MFs can be bought and sold from a mobile phone. Likewise for insurance.

Now this is not to say that all investment professionals are unreliable. As someone who has extensively written on personal finance, one has had the pleasure of knowing some excellent professionals who won’t get their customers to invest in anything that they themselves won’t invest in.

Nonetheless, the trouble here is on two fronts. First, how do the investors who are just starting figure out that an investment professional won’t take them for a ride. One way is to ask around. The second is to get to know them personally. Both the options aren’t very easy to execute.

Second, while investing their clients’ money, even honest and reliable investment management professionals look at past performance. Nonetheless, as data shows us, the chances of a MF beating its benchmark are rather low. So, even well-intentioned investment management professionals can end up investing money in a sub-par way.

Given these reasons, the era of do-it-yourself investing might just have arrived. Are you ready for it?

Vivek Kaul is the author of Bad Money.