Direct investment was introduced in January 2013 by Sebi for the do-it-yourself investors. The main benefit is the lower cost and higher NAV
With every passing day, the options available for investors to invest in financial instruments has only multiplied. While this has definitely improved the reach and availability, the same cannot be said if the investor experience and actions support the same. Multiple options have only added to the confusion, if one can say that. Investing in mutual funds is convenient as the key features are disciplined approach, multiple asset class options, liquidity and also a diversified approach, based on the requirements of the investor.
In mutual funds too, there are various schemes like liquid, short term, corporate bond, dynamic, gilt funds, diversified, ELSS and balanced funds. After the investor has decided to where to invest there are options of direct mode or through a distributor. Also, for the tech savvy, online investing option (including the app) is there, besides the traditional paper approach. One of the raging point of discussion today is about investing through the direct method in mutual funds.
Ways of direct investing
Direct investment was introduced in January 2013 by Sebi for the do-it-yourself (DIY) investors. The investors can directly invest in the schemes of the fund house without an intermediary in the form of the distributor. The main benefit is the lower cost and higher NAV, as the expense on distribution is reduced from the TER (Total Expense Ratio). This will add to the return of the investor over a multiple period horizon. This difference of 1% in TER, in a equity mutual fund (gives an additional return of 1%), over a 10 year period will result in an additional corpus of Rs 3 lakh, on a initial capital of Rs 10 lakh with 12.5% CAGR return.
Since 2013, there has been a substantial growth in the assets of the direct plan corpus and looking only at the return is the easiest part. However, the most difficult part is the journey of investing. Investing is not about the additional 1% or the excel calculations. All of these look and sound good on paper and provide data and fodder for conversation.
Method of investing
In fact, DIY investors are savvy and typically know what to do when to do and how to do. They are equipped with knowledge and information in the mutual fund space, which means that they are more financially aware.
However, the period between December 2015 to March 2016, the volatility in the markets would have caused a lot of stress among the first time investors in equity mutual funds and also those who had been investing for a longer period of time.
Investing is not about the additional return. It is more about how you as an investor managed your emotions and did not execute a knee-jerk reaction to the downward movement in the Sensex ot Nifty, which effected the NAV of your scheme holdings.
This is where having an advisor in the form of a Sebi-registered investment advisor or a mutual fund distributor, or a wealth manager (after you have done the due diligence in them before the appointment) can be of immense help.
Penny wise and pound foolish is not the approach here. You can potentially earn 1% more, but if you are prone to falling prey to your emotions, the destruction of your capital will be more than the anticipated additional returns through the direct plan schemes of the MFs.
Whatever be the method and approach adopted for investing, the framework for investing is the approach. The framework – the process is the approach, with milestones in place, time horizon for the investments, liquidity for the portfolio, as and when required, will stand in good stead for the investors. Investing is a process and trust the process.
The writer is founder and managing partner of BellWether Advisors LLP