Direct, Indirect or Nothing?
Investing through direct plans of funds makes sense when investors are certain that going through an intermediary offers no value...
By Dhirendra Kumar | Apr 10, 2013
Since the beginning of this year, mutual fund investors have had the option of investing in funds directly with the fund companies in special 'direct' plans of all funds. While investors could have invested directly earlier too, there was no advantage in doing so. However, since January 1, SEBI has asked fund companies to create special direct plans in which the commission that would otherwise have been paid to intermediaries goes to the fund's NAV, and thus to investors.
Even though it's early days yet, a handful of investors have started coming in through direct plans. This number could only grow in the future. It appears that compared to corresponding indirect plans, direct ones will have higher returns of the order of 0.4 per cent to 0.7 per cent per year. Over a long period, that does accumulate. During the last decade, the median large cap equity fund had returns of 18.81 per cent a year. That means an investment of Rs 1 lakh would have grown to Rs 5.60 lakh. A direct plan with half a per cent less expense would have delivered Rs 5.84 lakh.
Investors should maximise value but you have to decide whether over ten years this differential is large enough to forego the services of an intermediary. The answer depends entirely on what services your fund advisor offers you and whether you can substitute them yourself. Ideally, an advisor would be helping you with investment advise as well procedural help. If you don't think these are worth the extra money and you are confident of your do-it-yourself abilities, then you should go direct.
However, I find that the most important service that intermediaries provide is often not given enough importance--many a time, their sales pitch goads you into investing when you may not have done so. The worst investment is often when you don't invest at all and making you invest could be the most valuable service of all.