From January this year mutual fund investors now have an option to invest directly without going through advisers. Going so you can directly save around 50-100 bps of cost. I don’t know about investors mind but their is huge discussion going on among advisers and planners (who are concentrating only on fees) to defend which is good. Let us think practically about it’s suitability.
I am not writing this post either being an adviser of mutual fund or being certified financial planner, bug going through the ground realities of Indian investors mentality. Do you know the penetration of mutual funds in India? According to study conducted by Price Waterhouse Cooper and Confederation of Indian Industry (CII) in 2012, it is 2% to 3% of Indian household savings. This after the entry of mutual fund industry into India nearly two decades back. Interesting too see in this report is that, 65% of mutual fund AUM is concentrated in four metros. So rest of India contributes 35% of AUM. Do we think this as right kind of market for investing directly?
I am giving you few examples of how much educated are our customers when it comes to dealing with finance. From my experience around 50% of educated (I mean to say the educated who are in IT and IT related industry and holding good position with handsome salary too) don’t know basic things about banking like where to sign on cheque leaf, what do you mean by “Account Payee Only” or how to drop the cheque in bank. Can we call them educated??
Now when we come to investment, majority of these educated are mess up with insurance products as investment, bank FDs or PPF (if that guy is bit knowledgeable about finance). In such case pushing for direct plan of such investors will actually a hazard than the boon.
Eventhough I believe it is premature to come to judgement about the NAV difference between direct and regular plans, but I agree 100% that in long run it will really make a huge difference even we have difference of around 50-100 bps. But the point is, Are our Indian investors educated enough to take this advantage of going with direct plans?
When one go with direct plan, investors have to do all follow ups them self only. Will they capable of handling their investment on their own? I know only few understand the in depth concepts of selecting mutual funds and how to be winner. But what about the rest?
Hence instead of providing such opportunities regulators must first create the conducive atmosphere of investors who are knowledgeable and capable of doing it their own. So need of the hour is financial literacy than such plans. In my view such options are good opportunity for the countries where mutual fund penetration is more.
Saying so much about negative advice about going with direct plans is not my intention. So who can go with such direct plans?
- Who are capable of choosing plans on their own (First and foremost complex issue where investors find it difficult).
- Who are capable of processing documentation required on their own.
- Who track mutual fund industry updates and regulatory changes on regular base.
- Who can handle the service related issues like change of address, change of bank mandate, consolidation of folios, transmission of funds, inclusion of nominee, arranging for periodical statement of accounts, correction of mistakes in the account, change in KYC, change in contact information, etc.
- Investment in mutual funds is not like dealing with any one company. Based on your goals and fund you choose you have to select on different companies. So investors who can handle to deal with all mutual funds they invested can move to direct plans.
- Who can understand tax complications of their mutual fund investments.
- Last but not least who are active learners 🙂
So investors now have two options left out. First one is, continue with regular plans with the adviser whom you feel giving you a value addition to your investment in selecting funds, monitoring them, record keeping and giving you good service. Second option is, go with direct plans if you are expert else choose fee-only planners. Think yourself what type of investors are you and decide which option will be suitable for you.