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Which is better: regular or direct?

While it's widely known that direct plans help you earn more, is there a case for regular plans also? Jai and Veeru debate on the topic

Which is better: regular or direct?

Direct plans of mutual funds can save you a packet. New mobile-phone apps have now sprung up which make direct mutual funds as easy to buy as your groceries. But are they a good fit for everyone? Jai and Veeru debate who should go for direct plans and when it makes sense to stick with regular plans.

Veeru: Nice to see you. What has put that smile on your face today? The market's not looking all that great.

Jai: No, no. I was pleased about the emails I got from some of my mutual funds, stating that they are cutting the total expense ratios (TERs) on their direct plans.

Veeru: What do you mean 'cutting the TERs'? Weren't direct plans supposed to be cheaper than regular plans already? Two months ago, SEBI even issued a circular reducing the total TER cap for all funds by 0.25 per cent.

Jai: Yes, many equity schemes cut their expense ratios for their regular plans after that circular. But some of them also quietly hiked up the expense ratios for their direct plans. That's why I was worried.

Veeru: That's quite shocking. How come they hike direct-plan costs?

Jai: Well, I read that after SEBI's recent moves to prune fund expenses, AMCs were taking a revenue hit on their regular plans, so they decided to make 'adjustments' in their direct plans to make up. But the good thing is that a study by SEBI's mutual fund advisory committee discovered this adjustment and SEBI has since rapped fund houses on the knuckles for this.

Veeru: Good to see a vigilant SEBI.

Jai: But how come you don't know this? Don't you invest in direct plans?

Veeru: No. All my mutual investments are in regular plans, though an advisor.

Jai: But you are so clued in to the markets and everything! Never thought you will be like our friend Gabbar.

Veeru: When direct plans were introduced in 2013, I did think about them. But regular plans made sense for me.

Jai: What are you saying! Have you done the maths? The difference between the expense ratios of the direct and regular plans of multi-cap funds is now as high as 0.50 to 1.5 per cent.

Veeru: I get what you are saying. But I feel looking at cost savings alone to choose direct plans is being penny wise and pound foolish. Mutual funds declare their NAVs after reducing the expense ratio. So, I plan to keep a close watch on the returns on my regular plans. If they meet my expectations and beat their benchmarks, I am not going to switch to direct plans.

Jai: But fund managers may not find it so easy to beat indices in future, Veeru. When a direct plan adds 1 or 1.5 percent to your return every year, remember that it compounds to quite a lot of money over the years. What is your objection to investing directly?

Veeru: You are comparing the direct and regular plans of the same scheme. But have you looked at the difference between the best and worst funds in the multi-cap category? If I held the regular plan of Franklin India Focused Equity for the last five years, I would have made an annualised return of 19 per cent. But even if I held the direct plan of LIC Multicap Fund, I would have made only 10.5 per cent. So, choosing the right fund has made a difference of over 8 percentage points to my returns. I think sticking to regular plans and getting the help of an advisor is worth that extra 0.5 or 1 per cent in costs.

Jai: This is height of modesty! I know very well that you don't need an advisor to choose Franklin Focused Equity over LIC Multicap Fund. You know enough about funds to have looked at their track record and decided yourself.

Veeru: Ha ha! Well, you are right but the point is that selecting the wrong funds in a category can cost you a lot more than you save on costs by going direct.

Jai: Selecting the right funds is not so difficult with databases like Value Research.

Veeru: True, but what I have found difficult is checking on my fund performance from time to time and changing my funds at the right times. My advisor does a good job at that. She sends me a quarterly portfolio review and suggests changes if a fund has been lagging for too long. If I have to do it myself, I have to sacrifice my weekends. I like to have a good meal and a long nap on Sundays. I don't want to look at boring Excel sheets.

Jai: So lazy! Give me your Excel sheet and I will look at it for you - for a fee, of course!

Veeru: I was partly joking. I have found that having an advisor helps with many other things, too. She looks after not just my mutual fund portfolio but also my investments. She alerts me to good investment opportunities. She even made me update my address and nominee details so that all my paperwork is complete.

Jai: If you regularly look into your investments, you won't need a reminder.

Veeru: I have missed some great investment opportunities due to my 12-hour working. I would have been rich like our friend Gabbar today if I had invested my fat bonus in equity funds in March 2009. But I was so tied up at work that I missed that lifetime opportunity. Now I have an advisor who will nag me until I sign the cheque. She also keeps a watch on my asset allocation. She made me switch from small-cap funds to multi-cap funds last year and saved me a lot of headache.

Jai: Yes, I agree that is a big value-add. I did get quite carried away with mid- and small-cap funds in the last three years, seeing their returns. Even for people like me who've been investing for 20 years, it can be hard to resist pure greed.

Veeru: That's why I think it helps to have an impartial third person looking at your asset allocation, fund choices and investing decisions from time to time. It not only allows me to nap on weekends, it also keeps a check on the irrational emotional calls that I used to make with my portfolio.

Jai: Hey, are you so sure she is impartial, Veeru? You are investing through the regular plans. So she must be an AMFI-registered distributor earning commissions from the AMCs on your assets. It would be better to have a full-fledged registered investment advisor (RIA), who doesn't earn commissions and charges a fee for advice.

Veeru: Yes, but I haven't found one I can trust yet. For now, from my half-yearly NSDL statement, I know exactly how much commission my current distributor is getting. I ask her about the trail fee she is getting every time she recommends something to me, and she tells me. Earlier, I also used to double-check all her recommendations before acting on them. But I found the advice sound and now leave it to her.

Jai: That means you have been quite lucky with your advisor, Veeru. Getting a good partner in marriage and a good financial advisor are both equally difficult.

Veeru: Now that you have a wife, you probably shouldn't hope for the other.

Jai: Very funny. My experience with an advisor isn't so good. I used to invest in mutual funds through my online trading account with my bank. The bank assigned a relationship manager (RM), who used to call me up every week with fund recommendations. I would buy those funds and in six months he would quit and a new RM would come along with a new set of funds. Some of those investments did very badly. My portfolio suffered as a result. That's when I decided to do my investing myself and shifted to direct plans. I would rather give up my weekend nap than lose money like that.

Veeru: That makes it very clear who should go for direct plans. If someone is smart like you at planning out their finances, setting asset allocation and choosing funds, they can go direct. And yes, you should also not be lazy like me and should be able to spend some time reviewing your portfolio every three or six months.

Jai: There are RIAs who let you have the best of both, too. You can get advice from them for a separate fee and then do the investing yourself in direct plans.

Veeru: And if you decide to be a regular-plan investor, make sure the person dealing with your money wants a long-term relationship, not quick gains.