Ever since their inception in 2013, Direct Plans in Mutual Funds have garnered a fair bit of popularity. The obvious reason in favor of choosing direct plans is a slightly higher return (to the tune of 0.50 per cent per annum). However, it's worth considering the trade-offs you'll be making for this marginally higher return before jumping onto the 'direct investment' bandwagon. This 0.50 per cent incremental return may be too small a benefit when you weigh it alongside the potential advantages a retail investor may be sacrificing in the bargain.
Col (Retd) Sanjeev Govila, CEO, Hum Fauji Initiatives (New Delhi) cautions that not everyone should be blindly opting for direct plans. "Direct plans are good for investors who have the knowledge of mutual funds, have the time and energy to do regular reviews, patience to look at the markets and not lose their cool or become hyperactive when markets turn volatile", he says.
Cost-Benefit AnalysisLet's start with a brief cost-benefit analysis. For a typical retail investor making an SIP investment of Rs 10,000 per month, the net monthly impact is to the tune of 0.50 per cent of Rs 10,000 - or just Rs. 600 or so on a total investment of the first year amount of Rs 1.2 lakh.
What is the real cost of "Quality Advice"?
An unbiased Advisor can assist you not just in optimizing your mix of mutual funds based on your risk appetite, but also ensure that you invest only in top quartile funds within each category. Did you know that the difference in returns between top quartile and bottom quartile equity funds range from 15 per cent to 35 per cent per annum, depending upon category? In other words, there's a heavy price to pay in case you select an incorrect portfolio of funds. Armed with proper research, a trusted Advisor can assist you in avoiding irrational investment decisions based on emotions, and also guide you to invest in the best funds from the overall universe.
"The savings of direct plans can get easily squandered away by wrong selection of funds or nervousness every time markets twist and turn", says Govila. "As it is said, if you're on the wrong train, it doesn't matter how fast you go!"
The Importance of a Well Organized PortfolioWe've regularly come across direct investment clients who are keen to switch back to the services of an Advisor; since in their own words, they are "clueless about their investments" (a boomerang effect). Monitoring your portfolio becomes a huge hassle as soon as you cross 8-10 funds. Stacks of paperwork and statements pour in from a multitude of sources, rendering any effort to organize your investments useless beyond a point. The inevitable result: sub-par performance compared to portfolios which are neatly organized and monitored.
The Importance of Quality Record KeepingDid you know that over 22,000 crore of unclaimed assets exist across Financial Instruments in India? Investors who put in small amounts in a number of instruments are often unable to maintain their records properly. A Financial Planner can help create a central archive of all your holdings in order to avoid this situation.
Documentation HasslesDealing with multiple Asset Management Companies can become a nightmarish experience if the number crosses 4-5. Simply consolidating your portfolio and making ongoing transactions (such as redemptions, switches, SIP increases or SIP pauses) become extremely tedious.
The Final VerdictWhile Direct Plans may be beneficial for institutional investors or savvy high net worth clients, retail investors will benefit greatly from avoiding direct plans and availing the services of a qualified Financial Planner instead. The benefits far outweigh the costs.
"If an individual is a new investor, does not have adequate market and funds knowledge, does not have the time to monitor the portfolio and requires hand-holding through the investment maze, direct plans should be avoided", advises Govila in conclusion.
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