Should I invest in direct plans of mutual funds?

Nikhil Walavalkar

moneycontrol.com

Recent reports of more investors opting for direct plans of mutual fund indicate that savvy investors have opted to boost fund returns. Stories of how much one saves by investing in direct plans over couple of decades are certainly making investors give a serious thought to direct plans. But experts are of the opinion that it may not be the ideal solution for all. "Corporate entities, family offices and high networth individuals have shifted to direct plans as they have the necessary understanding of products, operational processes and can put in place a monitoring infrastructure. However individual investors may find it difficult to bring in these things to the table," says Anil Rego, CEO and founder, Right Horizons - an investment advisory and wealth management firm. Though all experts agree on the fact that the direct plans boost returns by saving on the expenses, they do point out other qualitative factors that can impact the outcome.

More returns

Direct plans reward investors for investing in a mutual fund without engaging distributors. After introduction in January 2013, direct plans offered a low cost option to invest in a mutual fund, by passing on the expenses incurred towards distributor commission to the customer. Hence you will see the expense ratio - the cost of managing your money, of a distributor driven regular plan is higher than the expense ratio of a direct plan. In long term this difference translates into higher net asset value (NAV) of the direct plan as compared to regular plan and investors in direct plans make more money as compared to investors in regular plans. Even if a direct plan offers half percentage point more than a regular plan the difference can be huge. For example, Sandeep invests Rs 10000 per month in regular plan of a mutual fund for 15 years and earns 14.5% returns, which translates into Rs 63.62 lakh. His friend Amit however opts for the direct plan of the same scheme and earns 15% returns, which gives him a sum of Rs 66.85 lakh. Have you seen the gap? So are you going with Amit? But wait for a minute. You should also know the efforts Amit takes.

Where to invest?

This is something Amit knows very well. If you understand the means to achieve your financial goals, then you should consider direct plans. If you are good at quantifying your financial goals in money terms, drawing an asset allocation plan for achieving your goals, knowing which schemes or instruments to invest in each asset class, then surely direct plans can be considered. However be careful at each of these stages. You can use online calculators to quantify your financial goals. You can also get some idea on asset allocation that suits your risk profile and your goals. But how about choosing individual schemes? "In 2007, most investors were invested in various infrastructure funds as it was a popular theme then. And then returns expectations did not materialize at all," points out Uday Dhoot, deputy CEO, International Money Matters. Popular need not be sensible while investing. Advisors can help you to ignore short term noises and make rational choices that work towards your long term financial goals, says Dhoot.

Transacting on your own

Nothing comes free in this world, neither investment transactions. If you are a first time investor it all begins with know-your-client requirement. If you are going direct, the distributor does the legwork for you. But if you want to go direct, be prepared to take some effort by visiting nearest mutual fund office or mutual fund registrar office with your documents. Also you have to fill the scheme forms on your own and submit them for the first time. If you get bored with such 'form filling stuff', then regular plan is the way out, where your distributor comes to your help. If you stick to your path of direct plan with our superinvestor – Amit and succeed with your first investment, then life becomes a bit easy as you can invest online thereafter. But here comes the catch, there is no single platform to transact in all funds. So for time being, remember passwords for all fund houses that you invest into. Add to this the paperwork to comply with regulatory requirements such as increased KYC norms and technology changes. If you are good at managing your transactions online, then the direct plans work fine. "High networth individuals put in place infrastructure to manage their transactions and monitor their portfolio performance, which makes direct plans work for them," says Anil Rego. Big investors enjoys efficiencies of size when they put in place all processes and infrastructure. Retail investors not necessarily find it worth the effort, he adds.

Monitoring

This is another issue faced by most investors. Keeping a track of their investments in various schemes is a task. You can choose to use online portfolio tools to track the portfolio on daily basis. However you have to rebalance your portfolio from time to time to suit your financial goals and changing risk profile. Market movements sometimes bring in undue influence on the investors and they may land on the wrong side of market. "Advisors can help you keep your emotions away and manage behavioural biases better while monitoring your investments over long term," says Dhoot. Are you really good at all these things? Do you have time to do it yourself? It is like designing your vacation without taking a tour operator's help. You may save some money, but it requires some leg work.

Our superinvestor – Amit is good at all these things and he is willing to take efforts to achieve his goals. Extra money that he sees in his kitty as compared to Sandeep has not come free to him. There are invisible costs attached to it. If you are willing to walk that extra mile, direct plan is for you.