Fund Basics. Should you move over to direct plans?

Over the last few years, the mutual fund industry has been debating the path-breaking regulation that necessitates fund houses to provide “direct” access to mutual fund investors.

The “direct plan” enables investors to buy directly from fund houses at lower expense ratio while the “regular plan” enables investors to have an intermediary on commission basis. It is also mandated that once in six months, the exact amount of commission paid to the distributor by the fund house needs to be communicated to investors. With the thrust on “direct” awareness and increasing transparency, why doesn’t everyone just move over to the “direct” plan and save some cost?

The regular plan expense and the direct plan expense differ to the extent of commission paid. Commissions are paid to facilitate advice that can ensure right product selection, after-sales service, handholding in adverse market conditions, and performance reviews, among others. The purpose of having two plans is to unbundle the cost of the fund from the cost of identifying and accessing it. If there are investors who know how and what to access and where it fits into their financial goals, they should know that there is a DIY option that costs less.

While the intelligentsia draws comparison in returns between the direct and regular plan of an MF scheme and demonstrates how one can save some money, there is hardly any plausible discussion on how one arrives at the right fund. There are fund houses that have 20 equity and debt funds each.

The other issue that’s related to investor behaviour is that with lack of suitable advice, a lot of DIY investors will pick funds that appear top of the charts over some time frame. But, winners in equity MF performance rotate on average every 18 months. There’s more to investing in MFs than just ensuring you are with the No. 1 at all times. It serves no purpose to buy a current winner and remain invested. The trick is to understand philosophies and processes that may work such that you get a top quartile performer over a sustained period of time.

Hence, the “direct” initiative, along with commission disclosures, needs to be seen as an effort in the right direction to bring in transparency by unbundling the cost of advice. Barring a few knowledgeable investors, it is meant to be an option to buy direct but pay for advice separately, it’s not meant to obviate the need for advice. And if one doesn’t want to pay for advice, one is better off in the regular plan of the “right’ fund.

When the “direct” plan was announced, the regulator also announced introduction of RIA guidelines. These Registered Investment Advisors cannot earn a commission, they advise clients for a fee. Simply put, there are practitioners who work on commission basis and sell you what is suitable for your circumstances and then there are practitioners who “help you buy” for a fee.

The writer is MD and CEO, Motilal Oswal AMC.

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