 "Are you investing in direct plans?")
It has been about three-and-a-half years since direct plans of mutual funds were launched in January 2013. Though informed investors, mostly companies, have been availing these services, retail investors are yet to turn aggressive.
But there is a strong case for direct plans. The expense ratio of these plans is lower than that of regular plans: The difference can range from 60-150 basis points, depending on fund type. While the amount saved each year may appear small, it can make a huge difference over a lifetime. Industry sources say that with an average saving of 100 basis points (or 1 percentage point) a year on expense ratio, an individual can end up with a retirement corpus that is around 25 per cent bigger.
No wonder, the Securities and Exchange Board of India (Sebi) is pushing them aggressively. It has asked fund houses to give half-yearly data on the expense being charged to the investor (who has come through the distributor), how it is being spent, and the cost of direct plans.
AMC websites
If you have enough knowledge about which funds to select, you should get your KYC (Know Your Customer) done and open an account with the asset management company (AMC) that you wish to invest with. By investing directly with a fund house, you avoid brokers and distributors. Not only do you avoid paying their commissions, you also circumvent the risk of being mis-sold. The problem with adopting this route is that over time, as the number of fund houses you invest with increases, the process gets cumbersome. If you are investing with five fund houses, you have to open five accounts, and remember five login IDs and passwords. A consolidated view of the performance of your portfolio will not be available. You will have to enter the information on all your transactions in the portfolio tracker tool on another website, which will take time. If you have done a few exits during the year, you may have to calculate your short-term capital gains liability or get a chartered accountant to do it at the time of filing your tax returns. Doing all this becomes cumbersome once your investments cross the Rs 25-30 lakh mark.
MF Utilities India
MF Utilities is an initiative of the mutual fund industry. Retail investors need to visit its website and fill up the Common Account Number (CAN) registration form. Once this number has been allotted, you may invest in direct plans of mutual funds through this route. At present, you can invest in 25 AMCs through MF Utilities.
The advantage of investing through this aggregator service is that investors can avoid dealing with multiple fund houses. "By filling a single form and offering a single cheque, an investor can invest in multiple funds across different fund houses. All he has to do is indicate how the amount should be allocated among various fund houses," says V Ramesh, MD and CEO, MF Utilities India. Investors have to pay no extra cost for using this service. However, remember that MF Utilities is not just a retail-focused endeavour. It also acts as an order aggregator and submission service for distributors. You will also not get the advice that you will with the next option that we discuss.
Online platforms
The earlier generation of mutual fund investment platforms basically offered you the convenience of online investing. They allowed you to invest in regular plans of mutual funds and earned the same commissions as an offline broker.
Recently, a new class of online platforms has emerged, such as Invezta, Oro Wealth and so on that allow you to invest in direct plans. By investing with such a platform, you avoid paying the broker's commission. In addition, you also avoid the conflict of interest that plagues commission-based agents and distributors. "When someone is earning money via commissions, he has an incentive to always keep you invested. He also has an incentive to keep you invested in equity funds, where he earns higher commissions, than in debt or liquid funds, where the commissions are lower, even when you need to invest in the latter," says Swati Aggarwal, co-founder, Oro Wealth.
In addition, these players also offer robo advisory services. Says Sharad Singh, CEO, Invezta: "Our analytics tools are used by leading fund and wealth managers and global institutional investors to analyse and select funds for investment. Invezta's robo advisory is backed by the same analytics and is available to the retail investor. In that sense, we have democratised quality advice."
These players do goal-based asset allocation, help rebalance your portfolio, and also lower your allocation to equities as you approach your goal. They factor in aspects like tax liability and exit load when advising you to exit a fund. In addition, they make tools like portfolio tracking and performance reports available.
Invezta charges a fee of Rs 79 per month from those who wish to do transactions only, and Rs 109 per month from those who want both transaction service and advice. Oro Wealth charges 0.1 per cent of the invested amount for investments above Rs 1 lakh. Below that level, it charges Rs 50 for a single transaction. For SIPs its charges Rs 200 per year. Its advisory service comes for Rs 1,000 a year.
The advice that these platforms offer, while not customised, is based on data analytics and financial principles. Such platforms could prove to be a good bet for mass affluent individuals. However, they are still in a nascent stage.
Sebi-registered investment advisors
With the regulator making feeds (which contain all back-office information) on direct plans available to Sebi-registered investment advisors (RIAs), the latter can now invest in these plans on behalf of clients. Like the new-generation online platforms, RIAs also earn their living from fees paid by the client and don't depend on product commissions. One model that some RIAs follow today for investing their client's money is through a custodian service provider (of which there are 17 registered with Sebi currently). The RIA provides the advice while the custodian service provider manages all the back-end work, such as investing the money, offering periodic reports to the customer (on the performance of his investments, tax liability, etc.).
This again is a nascent service model. RIAs we spoke to suggested that investors buying direct plans of mutual funds should not pay beyond 0.5-1 per cent of assets for advice from an RIA.
The RIA model is better suited for high net worth individuals (HNIs) who wish to be able to speak to the person handling their investments, especially in times of crisis. With an RIA you also get personalised advice. "For one client an annual vacation may be important while for another it may be spending on gadgets. Catering to these needs is only possible when the advisor interacts with the client," says Ankur Kapur of Gurgaon-based Ankur Kapur Advisory, an RIA.
Before hiring an RIA, check his professional qualifications. He should also be highly recommended by his existing clients.
But there is a strong case for direct plans. The expense ratio of these plans is lower than that of regular plans: The difference can range from 60-150 basis points, depending on fund type. While the amount saved each year may appear small, it can make a huge difference over a lifetime. Industry sources say that with an average saving of 100 basis points (or 1 percentage point) a year on expense ratio, an individual can end up with a retirement corpus that is around 25 per cent bigger.
No wonder, the Securities and Exchange Board of India (Sebi) is pushing them aggressively. It has asked fund houses to give half-yearly data on the expense being charged to the investor (who has come through the distributor), how it is being spent, and the cost of direct plans.
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However, retail investors haven't taken to direct plans because of lack of awareness. Ideally, if retail investors can combine direct plans with quality advice on fund selection and portfolio management, it would be a winning combination for them. Here is a look at the pros and cons of the various avenues available today for investing in direct plans. (PROs AND CONs OF VARIOUS INVESTMENT GATEWAYS FOR DIRECT PLANS)
AMC websites
If you have enough knowledge about which funds to select, you should get your KYC (Know Your Customer) done and open an account with the asset management company (AMC) that you wish to invest with. By investing directly with a fund house, you avoid brokers and distributors. Not only do you avoid paying their commissions, you also circumvent the risk of being mis-sold. The problem with adopting this route is that over time, as the number of fund houses you invest with increases, the process gets cumbersome. If you are investing with five fund houses, you have to open five accounts, and remember five login IDs and passwords. A consolidated view of the performance of your portfolio will not be available. You will have to enter the information on all your transactions in the portfolio tracker tool on another website, which will take time. If you have done a few exits during the year, you may have to calculate your short-term capital gains liability or get a chartered accountant to do it at the time of filing your tax returns. Doing all this becomes cumbersome once your investments cross the Rs 25-30 lakh mark.
MF Utilities India
MF Utilities is an initiative of the mutual fund industry. Retail investors need to visit its website and fill up the Common Account Number (CAN) registration form. Once this number has been allotted, you may invest in direct plans of mutual funds through this route. At present, you can invest in 25 AMCs through MF Utilities.
The advantage of investing through this aggregator service is that investors can avoid dealing with multiple fund houses. "By filling a single form and offering a single cheque, an investor can invest in multiple funds across different fund houses. All he has to do is indicate how the amount should be allocated among various fund houses," says V Ramesh, MD and CEO, MF Utilities India. Investors have to pay no extra cost for using this service. However, remember that MF Utilities is not just a retail-focused endeavour. It also acts as an order aggregator and submission service for distributors. You will also not get the advice that you will with the next option that we discuss.
Online platforms
The earlier generation of mutual fund investment platforms basically offered you the convenience of online investing. They allowed you to invest in regular plans of mutual funds and earned the same commissions as an offline broker.
Recently, a new class of online platforms has emerged, such as Invezta, Oro Wealth and so on that allow you to invest in direct plans. By investing with such a platform, you avoid paying the broker's commission. In addition, you also avoid the conflict of interest that plagues commission-based agents and distributors. "When someone is earning money via commissions, he has an incentive to always keep you invested. He also has an incentive to keep you invested in equity funds, where he earns higher commissions, than in debt or liquid funds, where the commissions are lower, even when you need to invest in the latter," says Swati Aggarwal, co-founder, Oro Wealth.
In addition, these players also offer robo advisory services. Says Sharad Singh, CEO, Invezta: "Our analytics tools are used by leading fund and wealth managers and global institutional investors to analyse and select funds for investment. Invezta's robo advisory is backed by the same analytics and is available to the retail investor. In that sense, we have democratised quality advice."
These players do goal-based asset allocation, help rebalance your portfolio, and also lower your allocation to equities as you approach your goal. They factor in aspects like tax liability and exit load when advising you to exit a fund. In addition, they make tools like portfolio tracking and performance reports available.
Invezta charges a fee of Rs 79 per month from those who wish to do transactions only, and Rs 109 per month from those who want both transaction service and advice. Oro Wealth charges 0.1 per cent of the invested amount for investments above Rs 1 lakh. Below that level, it charges Rs 50 for a single transaction. For SIPs its charges Rs 200 per year. Its advisory service comes for Rs 1,000 a year.
The advice that these platforms offer, while not customised, is based on data analytics and financial principles. Such platforms could prove to be a good bet for mass affluent individuals. However, they are still in a nascent stage.
Sebi-registered investment advisors
With the regulator making feeds (which contain all back-office information) on direct plans available to Sebi-registered investment advisors (RIAs), the latter can now invest in these plans on behalf of clients. Like the new-generation online platforms, RIAs also earn their living from fees paid by the client and don't depend on product commissions. One model that some RIAs follow today for investing their client's money is through a custodian service provider (of which there are 17 registered with Sebi currently). The RIA provides the advice while the custodian service provider manages all the back-end work, such as investing the money, offering periodic reports to the customer (on the performance of his investments, tax liability, etc.).
This again is a nascent service model. RIAs we spoke to suggested that investors buying direct plans of mutual funds should not pay beyond 0.5-1 per cent of assets for advice from an RIA.
The RIA model is better suited for high net worth individuals (HNIs) who wish to be able to speak to the person handling their investments, especially in times of crisis. With an RIA you also get personalised advice. "For one client an annual vacation may be important while for another it may be spending on gadgets. Catering to these needs is only possible when the advisor interacts with the client," says Ankur Kapur of Gurgaon-based Ankur Kapur Advisory, an RIA.
Before hiring an RIA, check his professional qualifications. He should also be highly recommended by his existing clients.