While comparing between the returns on direct and regular plans, we compare the returns of the same mutual fund scheme, in which the direct plan gives about 0.5-1 per cent more return than the regular one. However, the right choice of fund is more important than getting involved in the direct verses regular debate, as you will lose more money if you end up investing in a fund which is not suitable for you than investing in the regular plan of a suitable fund.
Traits like greed and fear directly affect the equity investment pattern of most of people, especially of inexperienced retail investors. As a result, they invest in equities when the market is rising and has reached near the peak, after seeing that the existing investors have gained high returns. However, at this juncture, mutual fund (MF) schemes that take exorbitant risks top the chart of similar equity funds and inexperienced investors end up investing in such a fund out of greed.
However, such a fund would end up at the bottom when there are corrections in the markets, resulting in negative notional return for investors who have taken undue risks by investing in the risky fund. Again, such inexperienced investors would end up booking huge losses by redeeming the funds out of fear. Although returns on investments through systematic investment plans (SIP) remain less affected by market fluctuations, but inexperienced investors even stop SIPs seeing negative returns in the short run.
While the difference in return between direct and regular plan is marginal, the difference in compound annual growth rate (CAGR) between a well-managed fund and an ill-managed fund of the same category may be as high as 8-9 per cent in the long run. Moreover, selecting a fund that would meet the goal depending on how soon or how late the investor needs money also calls for some study and experience.
So, instead of booking losses by choosing a wrong fund in the quest of gaining marginally higher return of direct plans, inexperienced investors would have gained either by consulting a financial advisor before investing in a direct plan or by investing through independent financial advisors (IFAs) in a regular plan. As investing through professional financial advisors or fund managers requires large money for investments or large consultation fees, it becomes convenient for retail investors to invest through IFAs, who keep a track of the performance of fund managers and mutual funds managed by them.