Direct Mutual Funds, the option in which investors avoid distributor trail commission by interfacing with the AMC 'directly', were introduced from 1st Jan. 2013. Here is a performance comparison with the regular option of some arbitrarily chosen funds.
I maintain this comparison file with my automated mf tracker and update it whenever someone's want the comparison in returns.
Equity direct funds have an expense ratio that is (conservatively) about 0.5% or so, on an average lower than the regular funds. This means that the direct investor will earn that much more return for each year they remain invested.
Although 0.5% sounds small, for someone who has invested for 10Y, the difference in corpus will approximately scale as (1+0.5%) * (1+0.5%) * (1+0.5%)* (1+0.5%)........ multiplied 10 times.
Is this large or small is an argument each investor has to answer for themselves.
I know a few investors who do not wish to break the relationship with their adviser because they trust them. Who am I to argue with that?
Who am I to argue with people who are comfortable with online portals? Not my problem. Not my money.
I also know a lot of investors who are simply too lazy to contact AMCs and think it is difficult. Today this process is trivial with most AMCs. To my knowledge with the exception of HDFC all 'major' AMCs allow a prospective investor to courier KYC and other documents after which an online account and subsequently a folio no is created upon investment. It is amusing to find young(er) people crib to do minimal paperwork. I would like to think, no one is that busy. It is just a matter of indifference.
By the end of this year, I expect the online investor portal MF Utility to allow investors to 'transact in mutual funds' even as distributors grumble.
In the meanwhile, the direct AUM share of the is pie is steadily increasing. It now stands at 33%
The media, driven by expert opinions of distributors and fee-based financial planners, continue to print that retail investors do not prefer the direct plan like institutional investors. This is not true. Retail participation in direct plans is steadily increasing.
Since mutual fund penetration is still low, this means nothing for distributors. They have a huge market to showcase their persuasion skills to. Instead of focussing on that, many write article after article on how an adviser is necessary and how people who don't know how to invest and manage in mutual funds should stick with regular plans.
I would like to believe such articles have contributed to the popularity of the direct plans. It is like asking someone to not think about mangoes!
Here is a simple thumb rule. If a financial article catches your attention, find out who has written it and recognise what the authors angle could be, before taking it seriously. Please do the same with my posts too.
Do you see anyone writing, invest in gold etfs now? They were the rage a few years back when AMC after AMC started gold ETFs. Do you see people writing closed-ended funds are not that bad now? After the budget did you notice people compare ELSS and PPF? See what I mean? Beware of what you read or see (including at freefincal).
I have said it several times and proved here and in the investor workshops, that
- mutual fund investing and management is not rocket science and is as easy as inky pinky ponky
- fund selection is tertiary. What matters is discipline. If you think a SIP will make you disciplined, please think again.
That is enough yapping. Over to the graphs. Click on them to enlarge.
This is the 1Y and 2Y CAGR returns and the difference between the two fund options. Do not conclude the CAGR difference will keep increasing with time. It does not work that way. It will work as mentioned above with the average expense ratio difference, which is equal to the CAGR difference. You can see that the difference is well above 0.5% for many equity funds.
The FT fund sticks out. This is because as discussed in FB group Asan Ideas for Wealth, the direct fund options of FT have extremely low expense ratios ... as of now.
This, on the other hand, will keep increasing with time.
This new year, resolve to buy or switch direct funds. Want some more motivation, check these out:
- Mutual Fund Returns Comparison: Direct Plan vs. Regular Plan
- Should We Switch To Direct Mutual Fund Plans? Calculate and Consider
What do I care? Why do I keep saying, 'go direct':
- If a person receives valuable advice from a distributor, then this CAGR difference can be forgotten. Unfortunately, I have come to realize that finding a trustworthy, competent advisor, whose knowledge extends beyond what is preached by the AMCs in their asset gathering initiatives, is extremely difficult if not impossible. Yes, yes, yes, not all people are bad. That is statistically impossible. My problem is that the average adviser competence is meaningless because the standard deviation is far too high. So why bother? Go direct. Take charge of your financial life. Be a DIY investor.
- I absolutely detest the way distributors and fee-based certified financial planners reacted and responded to the introduction of direct plans. That changed my perception of financial services industry. They don't care about financial literacy. All they care about is awareness of their services.
- Won't honest and sincere advisers be affected if direct plans are promoted? No. Mf penetration, as mentioned above, is extremely low compared to fixed income instruments (FDs, endowments). So there is a lot of room for the direct plan DIY investor and regular plan hand-held investor to co-exist without the advisers cribbing because of insecurity.
- Unfortunately, you will neither find the media, nor the AMCs promoting direct plans. So I do my insignificant part. That is my angle: disgust.
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!