Mutual Fund Tip: Want to earn additional 1-1.5% returns? Why it would be wrong

During the last few years, Indian economy has seen huge participation by retail investors in mutual fund investments. If you are an existing MF investor or someone wanting to invest in a MF, you must be aware about the direct and regular MF schemes.

During the last few years, Indian economy has seen huge participation by retail investors in mutual fund investments. Image Source: Reuters

During the last few years, Indian economy has seen huge participation by retail investors in mutual fund investments. If you are an existing MF investor or someone wanting to invest in a MF, you must be aware about the direct and regular MF schemes. The only difference between direct funds and regular funds is that in the former investor does not pay any commission or brokerage to the distributor/broker. The overall portfolio, scheme's structure and investing strategies for both regular or direct plan of any scheme will remain same.

There is a lot of debate going around this topic and investors are constantly facing the dilemma of which to choose. I am sure, you must have heard a lot about how direct MFs can help you save lakhs of rupees (how you can earn additional 1-1.5% returns) over a period of 20 or 25 years. In fact, there are many advertisements floating around highlighting this cost saving as the main benefit. So, does that mean that you can simply follow a Do It Yourself method and buy any direct fund? The answer depends on many parameters. You should not rush to invest in a direct fund until you are clear about all the pros and cons.

The most important factor in this debate of direct v/s regular fund is to find out the main objective, which hardly gets discussed. I suggest you shift the focus from saving cost to a larger objective. If I were to ask you about your objective behind investing money, you would mention earning returns and creating wealth. Saving cost is never the objective, though it does play an important role in every financial decision.

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The priority for investors should be to draw up a comprehensive financial planning, by setting clear measurable financial goals, with a road map for achieving the same. Decisions like which products and schemes to invest in, what returns to expect are the next steps.

There are hundreds of MF schemes to select from and choosing which schemes to invest in requires expertise. A wrong fund selection can get you a lower return than expected. In fact, the gap between the best or worst scheme could be as high as 5-10%.

Your investment needs a constant monitoring and regular review to re-balance. In case a change in the economic situation has the likelihood of impacting your goal planning, a trusted financial advisor will help you optimise the performance of your portfolio and help it outperform the market.

Your financial advisor will also handhold you during the time of distress and market volatility. At such times investors tend to take rash decisions, which could impact their portfolio negatively.

The other option is to have a fee-based financial advisor, who along with fees and a share in profits (if it crosses a certain percentage), can help you select the right plans. This will help you save the brokerage part involved in regular plan and also make your advisor more accountable, as his income will depend on the returns your investments generate.

Instead of debating about direct or regular plans, you should think about your main objective of achieving the financial goals you have set. Focusing on earning higher returns and achieving your financial milestones are a bigger objective than saving cost.

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In case you are already sorted out with your goals and can spend time, energy and possess the necessary expertise, then investing is simple for you. In that case, going direct and saving even a 0.1% cost makes complete sense.

(The writer is, chief gardener at Money Plant Consultancy)

Source: DNA Money

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Indian economy mutual funds