When it comes to long-term goal planning, the most popular investment instrument these days is investing in mutual funds.
Most investment neophytes may not know that mutual fund schemes come in two variants — Regular Mutual Funds and Direct Mutual Funds. The former are bought from the intermediaries, while direct mutual funds are bought directly from the asset management company. Traditionally investors used to invest through intermediaries like broker, distributors or advisors, but now they can directly buy it from the asset management companies also. Intermediaries who sell mutual funds earn a commission on selling it and the AMC recovers that commission from the investor in the form of expenses paid by the investors, and that is why expense ratio in regular plans is always a bit higher in comparison to direct plans.
When it comes comparing the returns generated by the scheme, being a low-cost option, direct plans are seen to be creating a watchable difference in the total returns and, therefore, attract the investors as they think that since mutual funds are managed by professionals, so they don’t have to really worry about picking a fund, which is wrong. A fund manager can be good at selecting the right stock from the pool bounded by the theme of that scheme, but it is the investors’ responsibility to check whether that theme or the pool is the right choice at this time. By just looking at the cost, investors should not abandon the other option as that extra cost in the other option brings an extra benefit of a professional or expert’s advice. Here’s how:
Value Added Services
When you invest in a regular plan, you are allocated with a financial advisor who not only helps you understand but also manage your funds more efficiently. So even though mutual funds are safe investments, without expert advice, investing in them may not produce the stellar performances many dream about.
Investing in mutual funds with the help of brokers, distributors and advisors may be well worth the money, because experts know the financial market considerably and can help investors put money where it earns the highest returns.
Continuous monitoring and Rebalancing
Investment backed with a professional advice makes an enormous difference in returns over a period of time. Investing in mutual funds is not a one-time exercise which ends with a single investment, but it requires continuous monitoring also to look at the performance of the fund at the right intervals. It becomes necessary to rebalance them from time to time. The reason behind this is not every sector performs at the same time so the investor who invested in well-performing market should expect it to sustain the same performance as the downturns are uncertain and inevitable also at the same time and here the role of experts plays a significant role as he helps in rebalancing & take advantage of changing market conditions. An expert can rebalance an investment made in a mutual fund. Such rebalancing takes advantage of changing market conditions. Over time rebalancing can generate additional returns of as much as 2%.
Every expert keeps a watchful eye on the portfolio of investors. On the other hand, most casual investors, even when they want to grow their money, tend to become neglectful of their investments. Experts facilitate investments, track portfolios, and keep track of changes to accounts. Retail investors who invest directly in asset management companies rarely do so. A neglected portfolio not only earns smaller returns, but it may also even generate losses in certain circumstances.
When it comes to long-term goal planning, the most popular investment instrument these days is investing in mutual funds. Herein you need to understand and analyze a few things, track record of the fund, whether it matches your risk profile or not, as these are some prerequisites of a sound goal plan and this exercise requires time and expertise which can be saved by going for a regular plan with advisor.
(By Jashan Arora, Director, Master Capital Services)
(Disclaimer: This is the personal view of the author. Readers are advised to consult their financial advisor before making any investment)