When the mutual funds direct option was introduced, the media started making noise about direct investments. Currently it is only the big corporates which has gone direct – and a few well informed investors. The numbers are not adding up the way the media thought it would.

Let us look at the logic of going direct.

Look at a professional aged 50 years and having about Rs. 1 crore.

He / she presumably does not have enough knowledge to choose funds and allocate assets. So it is in bank fixed deposits, some ad hoc equity and some assortment of mutual funds in which he / she has invested.

At this stage he decides to look at options and finds the following available:

1. Invest through Icici Direct: ha here is the catch! Investing through a broker, or a banker, or some websites, MEANS they are the brokers, so YOU DO PAY. Indirectly, that is all. The asset management company pays the broker a trail of say 0.4% p.a. In case the broker is very big it might get a bigger trail – say even 1% p.a. and that is coming out of the clients charges.

2. Use an adviser: Let us say the investor goes to an adviser and the adviser thinks that he will spend about 20 hours a YEAR on the client’s portfolio. Seeing it, analysing it, discussing with the clients, attending to panic attacks, and generally counselling. The adviser will charge anything between Rs. 1500 an hour to about Rs. 5000 an hour. So the fees charged could vary from Rs. 30,000 to Rs. 100,000.

In this case the client will have to do the execution himself. Go to the respective websites of the mutual funds and invest online – or offline. The client saves about Rs. 30,000 in the first year – and the amount will in general keep increasing (thanks to the impact of compounding).

The client has to think of the following :

Can the adviser really add value – like screaming against gold when the world is going into gold, or having the guts to say that ‘Hdfc top 200 has not done well for 3 quarters, but will catch up’ or ‘look Templeton India Pension plan is a slow, boring, good value fund, but a tad expensive’ or the guts to say ‘FMPs are risky’.

Will the adviser be able to get a 1% alpha – i.e. instead of going through a non advising website if you were to go through a adviser will he get you an extra 1% return – in case of a 1 crore portfolio it means Rs. 1 lakh.

What about record keeping? I feel that www.valueresearchonline. com , or www.moneycontrol.com , or yahoo finance, myiris.com, …etc do a far far better job than broker websites.

Unless you have a portfolio of Rs. 5 crores, know the markets, and are willing to put in efforts, YOU SHOULD GO THROUGH an adviser. Ask him, trouble him, and either pay fees or invest through him. Of course if your portfolio is less than Rs. 50 lakhs, some advisers may want a combination of fees and execution trail.

 

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  1. Read valueresearch and morningstar.com. Choose a fund from an AMC with excellent governance and pedigree, less expense, high Sharpe ratio ,
    reasonable performance for the past five years, a good fund manager and invest
    by SIP. Avoid financial advisers/brokers – most of them do not know
    how to analyse a mutual fund – you can do a better job than them. But you have to put in a little effort. Warren Buffett said ” Read everything you can”.
    Invest DIRECT.

  2. I agree with Vinod…choose a 5* fund from either Morningstar (which looks a lot similar to Valueresearch). Invest only in such funds. Also review once in 3 years.

  3. ‘Should you go direct?’ is a question relevant only to someone who understand the benefit of MF investing. Someone who does understand it, will sooner or later recognise the benefits of lower expense ratio and go direct on their own.

    If someone understands or wants to understand how a volatile instrument compounds and is willing to go the distance, direct is the obvious choice. Networth is irrelevant.

    Mutual fund selection and management is not rocket science. For those with the inclination and the maturity to understand the difference between risk and volatility, it is a breeze.

    Since most MF investors do not fall in this category, there is no need for distributors to feel threatened. I am sure they will get clients when the market zooms up.

    The law of averages should work in the distributors favour.

    It is understandable if a distributor says, ‘stay with me, you will have trouble if you go direct’.

    Is if clear conflict of interest if a certifiable financial planner (SEBI registered or otherwise) says this.

  4. Partially agree with Vinod and Vaibhavi…see the best funds and buy the shares that these funds have. You cannot go wrong buying Reliance, L&T, Ongc, Bharti Airtel – after all the mutual funds also end up buying these things…

  5. I agree with most of the things mentioned by you.Always invest directly by opening accounts with 2/3 fund houses.
    @ Sukumar
    See the best funds and buy the shares these funds have.. Good idea. Not the best idea. Most probably the returns will be less than the funds he follows.

  6. having been here long enough I have seen advisers adding TREMENDOUS value and completely useless agents. Personally I prefer going to direct equity, simply because I have a much much much higher risk profile.

  7. staying with an advisor or going direct should both be based on informed decisions.

    This decision is easy for those who have a history with an advisor (good or bad).

    Unfortunately, the other are surrounded by biased and crappy articles written by those with a stake in the issue.

    Most of the people who talk high and mighty about ‘spreading financial literacy’ don’t the guts to simply say, ‘go direct and learn along the way’.

  8. If Money saved is Money earned then for an Informed investor who knows Shankar,Prashant ,Keneth ,Siva,Apporva ,it should always Be Direct.Diversifying among diffrent fund Houses and across Large cap ,Mid cap ,Multicap …Direct will create More wealth at the end of Goal Period ,if Goals are Long term in Nature .Writing Login id and Password on Paper and sharing with Family Members is absolutely critical .Most Indian Houses where financial decisions and investments are still Unfortunately Done by males ,though their better halfs are Drs ,Engineers,Architects and are professionals…This is all the more Important .Infact its a good idea that let actual purchase in direct schemes be done by better halfs .We can sit beside them and talk about each Investment ,Its Linked Goals and Duration for which we are Investing.This will ensure that we achieve 2 things.

    This will ensure 2 things

    1.Going Direct will create more corpous at the end of Investing Period

    2. Better Half Learns How to Invest and even reddem if need arise while we are there

  9. no Milind do not agree with u at all. Enough advisers can MORE THAN JUSTIFY their fee. Also one correct switch – like last year switch from an Indian fund to an US Index fund would have JUSTIFIED the fee for a 10 year period!

    also the media has put too much emphasis on costs – and the lowest cost ULIP is managed so badly that the cost differential is lost in the underperformance. Even in fund houses they play favorites among some funds – so an adviser who knows these things surely does add value. But your typical next door fund adviser may not justify.

    Just imagine a friend who wanted to exit equity about 3 months back – just FORCING him to stay on (I could bcoz of the relationship) would MORE THAN JUSTIFY the fee.

    So even in some such cases the fee is justified.

    By the way in my stock exchange transactions i pay 1.5% brokerage. And i have brokerage houses WILLING TO DO IT FREE for me if I allow them to share my tips. My high brokerage is MORE THAN JUSTIFIED in the number of broker originated transactions – and he makes at least 10x the brokerage I pay. This happens because he is a very very strong buy team and a decent placement team…so it is all contextual….

    the question to ask is always

    What is the fees?

    What value add is he/she giving…

    dat is all….

  10. The major thing is to find that “Right Advisor”. If a person is intelligent enough to do research & find that “Right Advisor” he may also select some gud (if not best) funds.

  11. sir,
    i want to invest in mutual funds. can i invest direct.this will save some money is it not?
    is there any formality to be followed for direct investments?usually
    the expenses charged by the AMC is inclusive of agents commission is it not?
    can you kindly reply to my mail address
    with kind regards
    natarajan
    9245730898

  12. subra,

    are there any mf scheme which go hand in hand around rebalancing dynamically over long period. say two schemes (equity & liquid) equity transfer some value automatically rebalancing and protecting capital>

  13. Hi

    Needed your suggestion on my current MF portfolio and future plan:

    Current- Total Rs 10,000 monthly

    1) HDFC Top 200- Rs 2500
    2) HDFC Prudence- Rs 2500
    3) HDFC Balanced- Rs 2500
    4) IDFC Premier Equity A- Rs 2500

    Going forward- plan is to invest Rs 25,000 monthly. Investment horizon atleast 20 years- I am 34 now.

    a) Are the above MFs ok? HDFC Top 200 has been a laggard- should I continue or stay invested?

    b) I understand I am invested in two balanced funds- hdfc prudence and hdfc balanced- should I exit one or continue investing in both? Should I increase my contri?

    c) If I look at HDFC Top 200, balanced and prudence- am I right to say that I am overinvested in large caps ( ignoring the debt allocations of large caps) and trying to overheadge myself? I am 34 years now

    d) I like HDFC stable- moreover I am an NRI and already created HDFC Direct account- so easier to open a new SIP through HDFC- am I being foolish by investing only in HDFC AMC?

    e) I am planning to invest additional Rs 15,000 per month in SIPs and I am building a retirement corpus. Would adding more large cap and mid cap fund be good? my plans are as follows:

    Additional Rs 15,000 SIP monthly

    1) HDFC Midcap- Rs 2500
    2) Sundaram Select Midecap- Rs 5000
    3) Franklin bluechip- Rs 2500
    4) Any others (including increasing SIPs in exisiting MFs….would like to add varied and MFs which divrsify my porotfolio and gives aggressive returns….)- Rs 5000
    5) For debt- I am looking at PPF + NRE fixed deposits 1-2 years (both tax free)- should I consider liquid/ short term debt mfs?

    Regards

  14. Rohit, you are buying mutual fund like shares. You know the basics right, that a single mutual fund would hold 50-100 stocks. ( meaning it’s already diversified, even a single mf)

    You can just stick to 1 large cap and 1 mid cap fund. no need to diversified. or you need to calculator to calculate NAV of your funds !

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