Should you invest in mutual funds through a distributor?

"I seek my advisor's help to invest in mutual funds. Is that a good idea?" Mr Amit Kulkarni, one of our readers, asked us recently.

In India, about 79 per cent of Indians invest in 'regular' equity mutual funds , which means they put their money in funds through advisors and distributors, while only one in five invest in 'direct' equity funds on their own.

But whether it's a good idea to invest through distributors and advisors doesn't have a straightforward answer.

It's a good idea if...

• you are new to mutual funds
  
• you are not aware of how mutual funds work
  
• you can't select mutual funds on your own
  
• you don't have the time and skill to learn how mutual funds work

On the other hand, it's not the best of ideas if...

• you know which mutual funds to invest in
  
• you want to avoid paying higher expenses. (Regular funds usually have a 1 per cent higher expense ratio than direct funds).

Example
To understand how expense ratios can eat into your wealth in the long run, let's take an example of investing in a 'regular' and 'direct' flexi-cap fund.

Suppose you invested Rs 50,000 through a systematic investment plan (SIP) in Parag Parikh Flexi Cap Fund , this would be your final investment value at the end of ten years:

Therefore, investing in a 'regular' fund through an advisor or a distributor can cost you an additional Rs 8 lakh over 10 years, which comes to about Rs 80,000 per annum.

Although it's better for new investors to look at 'regular' funds, the more experienced ones can look at the more cost-efficient 'direct' fund option.

For that, though, you'd need to know where and which funds to invest in.

Solution
If there was a marketing plug, here it is, only because it is good for your wealth.

If you subscribe to Value Research Premium , you will get access to the following:

• Analysts' Choice : You get the list of the best mutual funds handpicked by our experts.
  
• Portfolio Planner : You are advised which funds to buy based on your goals, risk profile and investment time.
  
• Portfolio Analysis : Over time, you'd need to track your funds' performance and identify areas for improvement. This section will help you with that.

All this is available at Rs 5,841 for the year - far less than the expenses you'd otherwise pay to invest in a 'regular' mutual fund through a distributor/advisor over the long term. So, let's get started.

Suggested read: The best advisor

This article was originally published on August 22, 2023.