Why invest through Direct Mutual Funds?

SEBI Registered Investment Advisers (RIA) provide right financial advice and act in clients’ interest. RIAs are like Financial Doctors and are different from Distributors and Banks. RIAs focus more on advice where as Distributors including Banks focus more on products; just  like selling medicines.

Regular and Direct Mutual Fund Products 

The Mutual Fund AMCs design regular products factoring two components; i.e. the price of the product and the commission. When the investors buy Regular MFs; the  embedded Commission in it  is  passed on  to the Distributors  and Banks. It is like selling branded medicines.

But now SEBI has directed AMCs to design Direct MF schemes without the commission in it. It is like generic medicines. These are  transparent and the investors do not pay for the Commission component. These are not offered by the Distributors and Banks since they do not earn commission from it.

Benefit of Direct Schemes

SEBI has mandated that expenses ratios of MF schemes should not exceed 2.5% in case of equity schemes and 2.25% in case of Debt schemes. These include the commission paid to the Distributors and the Banks. We provide the comparative expenses ratio  of some Regular and Direct Mutual Fund schemes below .The differences are due to the commission embedded in Regular schemes. As may be observed, it is around 1% more in case of  Regular schemes than in Direct schemes .This excess of 1% in Regular schemes  are  paid to the Distributors and Banks.

                                                                                                              

Sl no Large Cap Funds Expenses Ratio(%)
Regular Direct Difference
1 BSL Front Line Equity 2.07 0.96 1.11
2 BSL Top 100 2.19 1.05 1.14
3 UTI Oppertunity 2.03 0.47 1.56
  Mid Cap Funds      
1 Motilal Oswal Most Focused30 2.48 1.29 1.19
2 HDFC Mid Cap 2.26 1.26 1.00
3 BNP Paribas Mid cap 2.47 1.03 1.44
  Small Cap Funds      
1 Franklin Smaller Co.  2.38 1.13 1.25
2 Motilal Oswal Most focused25 2.63 1.39 1.24
  Multi Cap Funds      
1 BSL Advantage Fund 2.24 1.03 1.21
2 Franklin High Growth 2.32 1.24 1.08
3 Franklin Prima Plus 2.22 1.19 1.05
  Balanced Funds      
1 HDFC Balanced 1.97 0.87 1.10
2 HDFC Prudence 2.26 0.97 1.29
3 ICICI Pru Balanced 2.25 0.80 1.45
  Monthly Income Plan (MIP)      
1 BSL MIP II Wealth 25 2.12 0.85 1.27
2 UTI Income Opportunity 1.61 0.47 1.14
3 UTI Dynamic Bond 1.60 0.79 0.81
  Source: Value Research July 2017

What should be the right way for investors?

If one buys Direct Mutual Fund schemes, one can benefit by around 1% by saving on commission. There are other factors in investment besides expenses ratios. They are asset allocation and risk. But how to know what should be the right asset allocation and best product from risk appetite point of view? For this one can take the help of   SEBI Registered Investment Advisers(RIA) who are  fiduciary and will act in client’s interest. They are like financial doctors and  will charge fee for the advice but bring   the following positives for the investors;

  1. Transparency: One can clearly know how much one pay for the product and how much for the advice.
  2. Cheaper products: SEBI RIAs encourage Direct MFs with nil commission.
  3. Risk profiling: Risk profiling helps in determining asset allocation which  is key for long term wealth creation
  4. Regular review: A professional investment adviser will conduct regular review of the portfolio..
  5. Rebalancing:  Asset allocation is monitored through regular Portfolio rebalancing.
  6. Win- win: The commission saved  in case of Direct plans (around 1%) can be utilized to pay the fee to the adviser and hence no extra cost for the investor.

How to buy Direct Mutual Funds?

Before we buy Direct MFs, we should be doubly sure  about the right products. For example, it is believed that ICICI Direct and Policy Bazaar sell direct plans; but it is not so. They sell only commission products.

There were issues on sharing of data feeds by AMCs with RIAs. This has been resolved now with the intervention of SEBI. This will enable the advisers to transact in Direct Mutual Funds, undertake portfolio review and rebalancing.There are online platforms for Direct MFs which can help RIA to view and monitor the portfolio.

If you are interested to invest in /switch to Direct Mutual Funds, please visit the link  Survey on Direct MF scheme

 

 

Last modified on Saturday, 26 August 2017 08:00

Prakash Praharaj

Shri Prakash Praharaj has a passion for excellence. He has been awarded two gold medals for securing top positions both in Graduation and Post Graduation in Commerce. He is an MBA with specialization in Finance and marketing. He has been awarded Diploma in Treasury, Investment and Risk Management besides CAIIB from the Indian Institute of Bankers. He is a Certified Financial Planner from the Financial Planning standards Board, India (FPSB), affiliated to FPSB, Denver, USA and Certified Personal Financial Adviser from NISM. He is also a SEBI registered Investment Adviser vide Reg. no. INA 000000045 dated 2nd August 2013.His book "Your Every day guide to Personal Finance and Insurance" has been published by CNBC TV 18 in August 2015.

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