How to invest in mutual funds: directly, indirectly or not at all?

  • Dhirendra Kumar
  • |
  • Updated: Apr 08, 2013 00:11 IST

Investing through direct plans of funds makes sense when investors are certain that going through an intermediary offers no value.

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 , the Securities and Exchange Board of India (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% to 0.7% per year. Over a long period, that does tend to accumulate.

During the last decade, the median large cap equity fund had returns of 18.8% a year. That means an investment of R1 lakh would have grown to R5.6 lakh. A direct plan with returns of half a per cent less would have delivered R5.37 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 that 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. Hence, making you invest could be the most valuable service of all.


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