Allotment of fewer mutual fund units due to higher NAVs is leaving retail investors investing through the direct investment plan confused.
Under this plan, investors invest directly without intermediation by the distributor. As there is no distribution fee, investors are charged a lower expense ratio by the fund house, translating into a higher NAV (than normal growth scheme).
For instance, the NAV of HDFC Long-Term Advantage Fund — Growth Option is Rs 149.686 while the same for Direct option is Rs 149.706.
A higher NAV will fetch lower number of units to invests, which is worrying them. For instance, if the NAV of a scheme increases to Rs 10.50 per unit from Rs 10 earlier, then for an investment of Rs 1,000, the number of units allotted would decrease to that extent.
The new investment plan has come into effect from January 1
Shying away
Flummoxed by this decline in the number of units allotted, investors are shying away from opting for the direct investment route, said analysts. “Investors should realise that they stand to gain in the case of DIP as the difference between the NAV of a DIP and that of a distributor-led investment will only increase in the longer term,” said a Chennai-based financial planner. The difference between the two NAVs is anywhere between 50-75 basis points per mutual fund unit, said fund analysts.
However, most distributors are miffed by the regulator’s move to introduce DIPs as they feel it is counter-productive for retail investors.
“Retail investors have had the option of investing online before as well. But it did not pick up because investors did not have the time to manage their accounts. Also, there is very little education as well,” said the head of distribution of a securities firm.
Dhirendra Kumar, Chief Executive Officer of online mutual fund tracker, Value Research, said investing through DIPs may not be worthwhile for retail investors.
‘Need hand-holding’
“Retail investors will always need hand-holding. It is not worth getting excited about as they stand to gain only marginally superior returns. DIP can be used by those investors who do not find their distributor competent enough,” said Dhirendra Kumar, Chief Executive Officer, Value Research Mutual Fund.
For instance, an investment of Rs 1 lakh over a period of 10 years at an expense ratio of 2.25 per cent against an earlier expense of 2.75 per cent would see investors saving around Rs 12,000 by way of distributor expenses during that period. This may not be insignificant, but not all that lucrative either considering the time period, said analysts.