Direct Plan of Mutual Fund is creating lot of buzz in Personal Finance space. In last one month or so, i have gone through atleast dozen posts on Direct Plan of Mutual Funds. The advantage of Media coverage is that it create buzz. Investors are seriously considering Direct Plan of Mutual funds which currently contribute less than 10% of total investments (Industry Estimate). Currently this channel is utilized by Institutional investors or HNI’s and that too in debt category. Contrary to the fact that expense ratio of debt category is very low compared to equity. In my post on 7 Steps to Select Right Mutual Fund, i mentioned Expense Ratio as one of the key criterion to select Mutual Fund. The advantage of Direct Plan is low Expense Ratio compared to Regular plan. Reason being, you are buying the units directly from fund house. There are no intermediaries, brokers, agents or distributors. The fund house pass the portion of Direct Plan trail commission savings to investor. Before joining the bandwagon of Direct Plan, it is advisable to understand the pros and cons of investment through Direct Plan in Mutual Funds.
Why Direct Plan is Beneficial for Mutual Fund Houses?
For all mutual fund investments through agents / distributors, they receive trail commission from fund house. Though fund houses argue that these agents or distributors don’t add any value through their advice. The suggestion of a distributor is normally biased and based on Trail Commission received by them. Agents / Distributors intentionally sell or de-sell particular mutual fund schemes depending on trail commission. In short, mutual fund houses are not in control of last mile connectivity i.e. distribution channel. It impacts their business. Mutual Fund Scheme offering high trail commission are promoted heavily by the distributors for obvious reasons. It leads to mad race to offer high trail commission to distributors. Small fund houses offer high trail commission as they have nothing to lose which impact business of big fund houses. In order to retain business, big fund houses also offer trail commission to distributors to retain the business. Mutual Fund is a volume business with thin profitability. Any trail commission eats into profitability of a fund house. In other words, savings on trail commission can potentially increase the profitability of fund house.
How to solve this problem?
The best solution is to create PULL factor for Direct Plan of Mutual Funds. Now how to create PULL Factor. Very simple, create an impression in the mind of investor that returns from Direct plans are high compared to Regular Plan. In other words, Higher Returns compared to Regular Plan is the sole USP of Direct Plans. Any mutual fund investor must have come across colorful posts on internet and media shouting loud on benefits of investment through Direct Plan. Graphs and Bars showing incremental returns are hitting the stars and moons. Is it true or are we missing the bigger picture?. Now you must be wondering, if i am getting higher returns in Direct plan then what is the harm in investing through Direct Plan of Mutual Fund. Lets check out the real story
Why Retail Investor should Avoid Direct Plan of Mutual Fund?
Before making any investment, it is advisable to do cost benefit analysis. This analysis should be both quantitative and qualitative. Lets check key parameters which impact Direct Plan of Mutual Funds
Size of Portfolio
Incremental return is biggest PULL factor for direct plan but it is imp to check its impact in absolute terms. As i mentioned that difference between expense ratio of direct plan and regular plan is negligible in debt category. In equity segment also, the average annual difference in NAV is only 0.5%. Assuming i am investing in particular fund through monthly SIP of Rs 2000. In laymen terms, it will impact returns to the tune of Rs 10 per month in terms of absolute return. For a monthly SIP of Rs 10000, the impact is only Rs 50 / month. Annual impact will be Rs 600 on an investment of Rs 1.2 lakh. On the contrary if i select wrong Mutual Fund, the difference between worst and best performing mutual fund in Equity-Large cap is whooping 48%. Return of best performing large cap equity mutual fund is 66%. Return of worst performing fund is 18%. Rather then wasting time to find out how to get incremental 0.5% return by selecting Direct Plan, i should invest time in identifying good mutual fund. It makes sense for large portfolio size of say 1 Cr to invest through Direct Plan. Absolute impact will be Rs 50000 every year. For retailer investor, 0.5% return will come with all kind of limitations and hassles as discussed in following points
Records of Investment
It was quite shocking for me that none of the financial planners touch upon this point in their post on Direct Plans. Today if i invest in 8-10 mutual fund schemes of 5 fund houses then i need to remember and store details of all the direct schemes separately. If god forbids and some thing happens to me then my wife has to search & trace all the details. We forgot one imp point that approx 22000 Cr investors wealth is lying unclaimed in various financial instruments. The only reason is either the investor forgot about investment or legal heirs of investor could not trace any record of the investment.
The basic thumb rule of personal finance says that all the investments should be consolidated, concentrated and preferably centralized. If i have single unified mutual fund account with bank or distributor then my wife can easily access all the details through single window. Remembering password of 10 different accounts is a big hassle.
Now you must be wondering what about single consolidated statement generated by CAMS etc. for all mutual investments. Answer is that you cannot rely on same. The day i registered my email id, i stopped receiving physical statement. My wife may not have access to my Email account.
Life should be clutter free and investments should be kept as simple as we can.
Documentation
Documentation is major hassle in direct plan for both online and offline investors. For each investment, you have to complete separate set of documentation. If you are active investor then its a nightmare. Today, i have mutual fund account with one of the leading private banks. I can place order / redeem mutual fund units with 2 mins flat without any additional documentation for each investment.
Operational Hassle
For investors who are not comfortable with online operation, it will be operational nightmare. For every transaction they have to visit the branch of fund house. In case of agents / distributors, they provide pick up service to regular investors. Also the agents / distributors have wide network of branches compared to branches of a fund house. In a city, you will find 1 branch of fund house but there will be 10-15 branches of popular agents/distributors.
Investment Advice
Though i agree that agents / distributors do provide biased opinion when it comes to selection of mutual fund. But i observed that not everyone does that. Secondly they explain basics of mutual funds which is imp. The trend is now changing. To retain investors distributors are not that manipulative as they were 6-7 years back. If investor will not gain from his advice then he will switch loyalties very soon. Under current regulatory framework, agents / distributors are struggling to survive and they don’t want to kill their business. For the first time mutual fund investor this basic education is required which is missing in direct plans.
A Big Hassle
Considering all the above mentioned points, Direct Plan of Mutual Fund is a BIG HASSLE at macro level. If you are active investor and rejig / churn your portfolio at regular intervals then its a major hassle. Even for small investors, it is advisable to evaluate performance of mutual fund every 6 months. Under direct plan of mutual fund, it will be nightmare. Direct Plan is beneficial for HNI’s or Institutional investors with large portfolio. From retail investor point of view, it is advisable to opt for online facility from your distributor preferably bank and invest in mutual funds with peace of mind. It is imp to select right mutual fund scheme and keep track of its performance for maximum returns.
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