Planning To Invest In Direct Plans? Here’s A Checklist

Direct Plans of Mutual Funds are on the rise, with AMC’s launching their own investment platforms and a proliferation of robo advisors. While some of these direct investments are being made with the advice and support of investment advisers, the larger piece of the pie consists of unadvised investments, many of them from first time investors. 

This can, unfortunately, prove to be quite dangerous in the long run, as many of these unadvised investors are not privy to the risks they are taking, or using flawed selection criteria for selecting their investments – or both. In reality, direct plans (if unadvised) are suitable for savvy investors. The others will invariably suffer when markets turn volatile over extended periods, which they invariably will.

If you aren’t a seasoned investor, here’s a simple checklist for you to decide whether or not the direct, unadvised route is meant for you. The more points you check off, the more confidently you can invest directly. If you are unable to check off most of these points, avoid the direct route.

You understand equity and debt markets

You have a fair understanding of the short term, medium term and long-term drivers of both fixed income markets and stock markets. For instance, you understand credit cycles, correlations between interest rates and bond fund performances, and valuation indicators such as Price to Earnings Rayio, Price to Book Value Ratios, and Market Cap to GDP Ratios, and their significance with respect to investment decision making.

You are clear on risk and reward

You are well aware of the risks that are intrinsic to all types of mutual funds. For instance, you do not harbour utopian views such as ‘debt funds can never lose me money’ or ‘balanced fund NAV’s will never go into negative territory’.

You are equipped to select funds

You can looking beyond short term past returns, and evaluate a fund based on its philosophy, fund manager pedigree, sectoral focus, stock selection methodologies, and the like. You do not just go ahead and pick the ‘flavour of the month’.

You are in control of your biases

You are capable of pressing the override switch with respect to emotions such as greed and fear; thereby avoiding all too common biases such as the loss aversion bias, the conformation bias and the sunk cost bias, to name just a few. You are also capable of ignoring the market noises around you and using common sense to guide your investment decisions.

You have plenty of time at hand

With no intermediary to assist you, you’ll eventually have to befriend call centre executives at many asset management companies, to help you with your statements, your paperwork, your ongoing transactions and your service issues. Make sure you’ve got enough time on your hands for doing this.

You are a disciplined person

You have the ability to take hard calls that go against the grain. For instance, you are capable of rebalancing your portfolio back to your target asset allocation after a bullish phase, despite the noises (and the voice in your head!) screaming ‘invest more money into equities’. You have the wherewithal to draft your own financial plan and stick to it resolutely.