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Save on commission, grow your wealth faster by going ‘direct’ in MFs

Author: Kumar Shankar Roy/Wednesday, September 12, 2018/Categories: Mutual Funds, Expert View

Save on commission, grow your wealth faster by going ‘direct’ in MFs

Did you know that by investing Rs 5,000 per month in mutual funds for 35 years through distributors can cost you 25 per cent lower return? Yes, investing Rs 5,000 per month through distributors, who get commissions from fund-houses, gives you a corpus of Rs 86 lakh if the investment grows at 8 per cent per annum. But if you went with ‘direct’ plans, read no commission, then you would have accumulated Rs 1.08 crore at the same 8 per cent return; that’s Rs 22 lakh more. Mutual fund distributors make you invest in ‘regular’ plans, and regularly take 1 per cent or more each year from your investments. Twenty years later, 1 per cent + 1 per cent + 1 per cent ... will add up to 20 per cent of your savings. So for those investors who can do it themselves (DIY), ‘direct plans’ are the way forward.

The world of ‘direct’ MF investing has been around from 2012, but lack of awareness has cost investors thousands of crores every year. Just last year, fund-houses paid over Rs 8,000 crore in MF commissions. The ‘direct’ investing world has seen exciting times recently. Most people are accustomed to Paytm wallet. Now, the company has entered the world of mutual fund distribution by offering investors direct plans of mutual fund schemes with no hidden commissions, free account opening, paperless investing etc. But Paytm Money is not the only player in this. There are different digital platforms, such Kuvera, Clearfunds, Groww, ETMoney, Paisabazaar, Coin by Zerodha etc, who offer investors similar benefits. 

So, how should investors decide on which is the best platform if they want to go direct? They can always use AMC websites to invest in direct plans, but there is the problem of opening individual accounts with each AMC/login credentials etc. Platforms like Morningstar and Value Research give ratings on mutual funds, but at present do not allow you to transact.You can also transact through mobile apps from Karvy (Ktrack) and CAMS (myCAMS). 

As MF investors mature, they are seeking a single platform where they can do all types of transactions, get a full view of all their investments and access advisory as and when required. This is where digital MF platforms come into play. It is important to note that most digital MF platforms offer basic MF services free of cost. They also do not get any commission from fund-houses, which enhances your returns. For other value-added services, they may charge a fixed fee (per month or per year or as a percentage of assets). 

Unlike a distributor who does not directly charge you but gets commissions from fund-house (who then passes it on to the customer in the form of a lower NAV), digital platforms are offering you practically the same thing at ‘zero’ cost. They sell direct plans, which means they do not get any hidden commission from the mutual fund companies. 

It must be noted that even if you stop using an offline broker’s services, he/she will continue to receive the hidden commissions on those investments because his/her broker code is attached to your initial investment.

The commission you save comes back to you in the form of higher NAV on your mutual funds. Typically, the expense cost of a direct MF plan is 100-150 basis points lower than the same fund’s regular plan. For instance, the expense ratio of Axis Bluechip Fund - direct plan is 0.94 per cent but the expense ratio of Axis Bluechip Fund - regular plan is 2.54 per cent. This is the saving that you immediately get when you switch to direct plans.

Digital platforms are able to give you free services because they run very tight operations. They do not have glitzy offices and excessive employees. They use technology, which lets them offer you services virtually free. For new investors, most platforms will allow you to register your details online. The pre-filled investor registration form is sent via mail and the investor needs to sign it after printing. While sending it back, do remember to send your bank accounts details via a blank cancelled cheque and your signed bank mandate (emailing a scanned copy of your cheque also works). Your KYC formalities are done in 10-15 days, and your bank account is linked so that you can transact. Digital platforms don’t need a demat account from you to enable investments in mutual funds. 

Hence, the service experience is one of the most parameters of judging a digital MF platform. The flipside is that an investor needs to personally experience a platform before assessing its usefulness. If all your credentials are correct and you are digitally savvy, you should find most digital platforms offering similar service experience when it comes to conducting transactions. If you have already used a free digital MF platform, do send us your feedback on the good, the bad and the ugly.

The more important parameter would be the quality of advice. The quality of advice is hardest to judge. It will only be proved over time. Many platforms use their own algorithms to recommend funds. Some have their very own ‘curated’ list. Others use a third-party rating agency like Value Research or Morningstar to give you funds. Paytm Money, in its initial stages, recommends ‘Top Rated Funds’ that adds up the ratings of the three rating agencies : Value Research, Morningstar & Crisil and ranks funds according to the total. It then ranks the funds according to their historical returns. Paytm Money also recommends funds based on top-rated fund managers and investment ideas. 

For any digital platform, you must know the rationale behind the ‘recommended funds’ list. It would be worthwhile to check whether your online MF platform actually has the experience to recommend funds for your long-term savings. Some platforms claim to have built an algorithm but are at pains to demonstrate or explain how they work.

Transparency is extremely important to you. Transparency is not merely saying that they do not take hidden commissions. It goes deeper. Check if your digital platform clearly shows the performance of your investments across time periods. Also, please check what is the performance of their recommended funds over long periods of time like 5, 10 and 15 years. They may not be around that long, but there are many funds which are over 10 years old. Also, it is important to assess the fund performance against the benchmark and the peer category across different market cycles i.e. bull market, bear market, and flat market.  

Investing is a lot more than the ability to buy and sell MFs online. The length and breadth of MF offerings are also important. Many digital platforms have tie-ups with just 15-20 fund-houses. There are 40 in the industry. So if you happen to choose a fund that is not available on the platform, you are stuck. In such a situation, you will have no other option but to go directly to the AMC website. 

Fees are of course part of the equation. Zero commission platforms should not charge anything for offering basic services. Look at any charges or fees when you make additional investments, switch between schemes, increase/reduce/stop your SIP etc. Some platforms may charge for value-added services like risk profiling, goal planning, investment recommendations, and portfolio monitoring. Some also charge you fees once your MF portfolio value crosses a certain threshold. So, be aware of such tricks. Your goal is simple: to pay less; the lesser you pay, the better are your returns.

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Kumar Shankar Roy
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