The debate continues on whether a direct plan is better for investors or should one go through a distributor to invest in mutual funds? Read my views on the same below:
The English translation is as under:
Mutual fund companies have introduced direct plans some time ago. There have been many discussions around these plans and the advantage of low-cost that these offer. Let us understand these plans and see the benefits to investors. We would also look at the other side: Are there any pitfalls? Is there anything that an investor needs to understand?
First of all, what are direct plans? How do they differ from the regular plans? As you know, mutual funds are sold through a distribution channel comprising of various individual mutual fund distributors, banks and various companies in the business of mutual fund distribution. As per the SEBI regulations, these distributors are required to recommend mutual fund products to their clients based on the analysis of suitability of the schemes to the investor’s needs and situation. For this work and to service and advice the investor on a regular basis, the distributors earn a commission from the mutual fund companies.
A few years ago, SEBI introduced a “direct” plan that would allow investors to bypass the distributors, if they feel they do not need to advice and services of these distributors. Due to this, the expense ratio for the direct plan is lower than the regular plan. The gap between expenses for the direct plan and that for the regular plan may vary from scheme to scheme and from one fund type to another.
One may be tempted to calculate that this difference could make a huge difference over the years. However, prudence requires that one always look at the cost in the context of the value received. Cost for anything can never be high or low in isolation. Does one get value commensurate with the cost?
So what value does a mutual fund distributor provide, really? Many are under the impression that a mutual fund distributor’s greatest value is in selecting the best mutual fund schemes. This cannot be farther from the truth.
First of all, what exactly is “the best scheme”? Are we looking at a scheme that would offer the highest returns in the future? What is the basis of identifying this? Past performance? If that is the way to select schemes, you do not need any help. The data is easily available on many websites – for free.
The “best scheme” is the one that is most appropriate for you – given your unique situation. More often than not, it is not one scheme, but a combination of schemes that an investor needs. A good distributor can help decide on a good combination of schemes. You see, in our regular diet also, while one needs to have varieties to get proper nutrition, one still cannot mix milk and lemon.
A seasoned distributor, a veteran, and experienced one would also be able to put things in perspective better than most investors can do themselves. A veteran is supposed to have a balanced head on the shoulders. This allows one to focus on what matters and think clearly without getting swayed away by the external turbulences. This ability to stay focused helps the distributor to get the client also to focus on what matters most in life. Such a focus then allows the investor to comfortably achieve life’s financial goals.
There are many operational issues that take away a lot of time. In case of such issues, a distributor may know how to handle critical situation since one may have handled the same case for few other clients. For an investor, each issue may present a new challenge taking away too much of precious time. If one calculates the “money value of one’s time”, it may turn out to be much more than the gap between the expenses between direct plan and regular plan.
Think about it – do a rough calculation – you might be surprised.