Why these investors went direct

“Savvy investors put a portion of their money in equity. Savvier ones do this through good mutual funds. The savviest go for the direct plans of these mutual funds.” This is how a market veteran sums it all up.

Direct plans, where investors bypass intermediaries and invest directly in the mutual fund scheme, are picking up pace.

Their growing popularity is with good reason — no intermediary means no commission and no commission means higher net asset value (NAV) in direct plans. Now, the commission can be as much as 1 per cent each year for equity funds. Compound this over a long-time period, and direct plan investors stand to earn much more. Say, you invest ₹2 lakh today in an equity fund for five years and this grows at 15 per cent each year. With a direct plan — without the commission of 1 per cent — you get about ₹17,000 more after five years compared with an indirect plan. And for the savvy investor, every rupee counts.

That’s precisely what Namita Ramani Sharma, a 28-year old public relations professional, likes about direct plans. Says Namita who has been investing in mutual funds since 2010, “With a direct plan, I save on the expense ratio. The higher the expense ratio, the lower is your returns. And the longer your investment period, the higher is the impact of expense ratio on your returns..”

Concurring with Namita are 34-year old Rahul Jain, an MBA, and 48-year old R Vishwanathan, a Senior Business Consultant in a software company. Late last year, Vishwanathan opted for direct plans when he noticed different NAVs for direct and indirect plans. He says, “I happened to visit my mutual fund to extend my existing systematic investment plan (SIP). I noticed from their statements that schemes marked as Direct had a variation in their NAV compared with others done through brokers. So in my case, it was a kind of coincidence.”

Then, there are some who went direct for reasons other than cost savings. A seasoned investor, who has requested anonymity, has been investing directly with mutual funds since 2004 — much before the separate NAV rule for direct plans was introduced in January 2013. He says, “I never thought of the pennies. My belief is that you should chase the pounds in the limited lifetime that you have. If one is invested for the long term, the returns are good enough to not bother about some small change.

So why did he choose to go direct? Two reasons, he replies. “In the post-dotcom bust era, with the equity markets moving sideways, direct equity punters could not take positions in the markets on a day-to-day basis. The mutual fund alternative was the only option, given my firm belief in the long-term India story. Two, I had no faith in intermediaries, who I strongly believe are aligned more with corporate/fund interests than individual investor interests.”

This distrust of intermediaries is shared by Namita too, who says, “With direct plans, I enjoy my freedom of choosing options, without being carried away by the sales pitch of brokers who try and sell me the product where they earn more commission.”

Don’t these direct investors miss the research inputs provided by many intermediaries? Turns out they don’t because they do their own research or get it from publicly available sources.

Rahul says, “I do my own thorough research and get advice from other market participants.” He prefers only well-known fund houses which have been performing consistently. Vishwanathan says, “Research inputs are definitely required. For these, I rely upon business newspapers and other portals, which come up with analysis at different intervals.” Namita follows a similar approach. She says, “I do my research and read the funds ratings on websites such as Morningstar, Moneycontrol, ET Wealth , Mint and BusinessLine .”

The anonymous investor mentioned earlier has strong views on this. He says, “I believe the ‘research’ provided by intermediaries is biased, because no intermediary has ever invested time in understanding my needs, my investment horizon or my profile. They just come back with ‘this is looking good’, or ‘this NFO is opening in a week’. The more important thing I have realised is that one doesn’t need research advice as a running commentary. So, this whole idea of continuous research is just sales jargon. Mutual fund investments are for the long term. It stands to reason that if you are not going to buy and sell mutual fund units on a daily or weekly basis, you don’t need a market commentary. What you need is one-time insight on a fund house/scheme and fund manager.”

But isn’t doing all the paperwork by oneself and going to the office of the fund or registrar a hassle? That’s not the case, say these direct plan investors, because these plans can be subscribed to and managed online on the mutual funds’ websites.

Says Namita, “The sales executive at the fund I first invested in helped me in completing my in-person verification (IPV) and know your customer (KYC) formalities and also in transacting online. He showed how easy it is to make investments online with the help of their website. Convinced with the experience, I started investing in other funds as well. It is more like online banking.”

Vishwanathan, who also prefers to invest online, says that there are no major hassles if one’s permanent account number (PAN) is KYC verified. If not, then it is a one-time effort of filling a KYC form, he adds.

Also, these days, the fund registrars send mutual fund investors consolidated monthly statements with details of all the fund investments tagged to the PAN number. Vishwanathan, though, is not too happy with the bother of having different online facilities with different mutual funds and the trouble of remembering multiple passwords. But he is hopeful that the way he now gets consolidated statements, sooner or later, there could be an online option provided to access all the funds with the registrars.

A common thread connecting Namita, Vishwanathan, Rahul and others is that they are well-informed with the know-how to research and decide on their own. They are also disciplined long-term investors who prefer the SIP route to tide over market fluctuations.

This brings us to an important point — direct plans are not a one-size-fits-all solution. Many financial advisors caution that selecting the right scheme for one’s portfolio from the hundreds on offer is not everyone’s cup of tea.

Namita sums it up aptly, “Knowing what you are investing in is critical because that will help you set expectations right and plan for goals effectively. You should necessarily do your homework prior to taking the investment plunge. If you don’t have the time or willingness to do your research before investing, you can take advice from a financial advisor and design your portfolio.”