Investing money is the process of committing resources in a strategic way to accomplish a specific objective
– Alan Gotthardt
When I completed my CFPCM Program (CERTIFIED FINANCIAL PLANNERCM) in the year 2012, I decided to become a consultant rather than continuing with selling.
Until that time, I had sold insurance, mutual funds, real estate, etc. for more than two decades.
I wanted to guide by offering an unbiased opinion, something that we call as genuine advice.
But the big question was; who would take my advice.
Would there be someone who would be all ears to my advice and invest in mutual funds on his or her own? Could I continue offering my guidance and assistance to invest in mutual funds? If yes, could there be some additional benefits to my client? Would I feel prideful in this new role? Could there be a win-win situation for my clients and me also, at the same time?
When I was looking at different permutations and combinations, suddenly a new regulation featured, that was about to be launched.
The Government of India decided to introduce two new options to invest in mutual funds.
Option “Regular”: where mutual funds were sold and monitored by the mutual fund distributors.
Option “Direct”: where the client had to buy the mutual fund “directly” and no intermediary was going to be involved.
I analysed both the options And chose the latter
I didn’t want to be a distributor for mutual funds any longer! Why? Since I would have been dependent on my earning from all the “products” sold by me, so the more sale, the more I would have gained. Also, some products offered more commission, which means there could be bias in what I would advise if I sell regular mutual funds.
If I assisted clients to the later route of buying direct mutual fund options, I could offer an unbiased opinion. I could monitor my client’s investments at the same time. I could charge a fee for providing such advice and monitoring services as well.
Finally, the year 2013 witnessed the launch of the SEBI Registered Investment Advisor Regulation.
I got my firm registered under the SEBI act as the Registered Investment Advisor in 2013.
I dedicated myself completely to the fact that I would succeed only if my client succeeds. Therefore, in my quest to win the game for the client, I started to ask myself the ‘how’ and ‘why’ questions. Being backed by more than two decades of experience and with the unwavering wick of passion, I started to write down the answers what my mind threw at me.
Here are the articulated top significant differences that could make my client richer, when they invest in direct mutual funds.
- Almost all mutual funds are available in two options – the direct version and regular The only difference is that regular mutual funds have a distribution commission that is paid to the particular distributor. On the other hand, direct mutual funds do not involve any distributor, and hence no commission is paid. But how would an investor benefit in the case of direct mutual funds?
- Returns: I have analysed the last five year trends (2014-2019) of specific mutual funds and found a significant difference in the actual returns of the The direct option yielded about 1.2% higher return year to year.
- The Myth of Fee: A lot of my clients assumed that when they invested through a mutual fund distributor, they did not have to pay any fees or charges? However, on most of the occasions, they asked me for Most of them invest in regular mutual funds after seeking the advice of their friendly mutual fund advisor, bank or agent. But they do not realize that the fee paid to the advisor comes from their pocket only. That fee is deducted straight from their invested amount. This is the amount that is paid to the mutual fund distributor. Hence the fee is deducted as a percentage of your investment by the respective mutual fund company. This difference ranges from 1.2% to 1.5% for equity funds and around 0.5% for debt funds.
- Lower Expense Ratio: I also analysed the difference in the respective expense ratio between regular and direct mutual The difference was again around 1.2% in equity mutual funds. The expense ratio is the fees charged by any mutual fund company to incur the expenses required to run that fund. Meanwhile, in a direct fund, no commission fees or distribution charges can be deducted by the AMC (Asset Management Company). This conforms to the regulation passed by SEBI in 2013. The expense ratio is much lower as the mutual funds are not paying any commission to the mutual fund advisor. Thus, the direct mutual fund buyer saves a lot of money over their investment horizon.
- The NAV (Net Asset Value) of any direct mutual fund is always higher than the regular version of the same mutual If you avoid the fees paid to the advisor, then the amounting NAV is higher. Consequently, direct funds do tend to have a higher NAV, in comparison to the regular funds of the same mutual fund. Thus, your total investment value ultimately is higher in a direct fund.
- Misled Opportunity: When I recommend direct funds, there are no hidden charges, vested interests, or ulterior How? Some investors may think that investing through a mutual fund distributor or agent may help in springing up their investment. However, this is a myth! I have come across forums with such complaints, which were filed against some advisors which had misled investors. How? It was just by mis-selling in the pursuit of personal gains. Here, I do not mean that all of the advisors have an itchy palm; there are genuine advisors as well. But the presence of such money-grabbing advisors cannot be ignored either. They may disregard the ultimate benefit of the customer and instead opt for their vested interests. However, these are only short-period gains to an advisor but also long-period returns to an investor. This is what I call as the “conflict of interest”. If you check the definition of the word, “FIDUCIARY”, it says: relating to the responsibilities of a person or organization that manages property or money belonging to another person or organization. This is where the significant difference lies in the intent of the SEBI Registered Investment Advisor and a typical (regular mutual fund distributor) advisor. The intention to help in case of direct mutual fund option is what marks a considerable difference in the end. Ideally, there should be no misled opportunities — only the right directions.
- Control Systems are with you: The investors are entirely in control of their mutual fund In the case of a direct fund, the investor has to engage and meet with the mutual fund company directly. However, like my firm, some SEBI RIA do assist and monitor such investments in direct mutual funds.
Conclusive Note: An investor, while investing in a direct mutual fund has all the controls in hand. He can manoeuvre his or her ship. He can always hire a captain to navigate his investments to the desired lands or goals. Since the captain is paid for a job, so he is not biased or swayed by the incentives.
As an investor, you must know where you are going to ensure that you reach your destinations.
This way, you can, and you will undoubtedly find a way. At the same time, a detour or an obstacle may try to stop you. Your money and your investments also work in the same way.
You should know when to opt for Plan B even if it requires taking a 360° turn.
If you have learnt and believed in your path to the richness, no one can stop you. All you need to do is, envision your path of richness.
Taressh Bhatia is a CFPCM CERTIFIED FINANCIAL PLANNER CM and is the founder/partner of Advantage Financial Planner LLP – A firm Registered with SEBI (Securities and Exchange Board of India) as RIA (Registered Investment Advisor).
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