Beware! Direct mutual fund plans have a dark side, too !!!

The genesis of direct plans is to offer a lower cost product to knowledgeable and sophisticated investors, either institutional or otherwise. The intent of direct plans was never to entice individual or first-time investors to mutual funds with promises of higher returns. That is currently happening now in many underhanded ways.

Currently, several registered portals are promoting direct plans by projecting future returns. Often, these projections are shown anywhere between 10 and 18 percent. This is a direct violation of the basic principle that future returns cannot be projected and the SEBI advertising code. It is misselling.

2> some portals use the sales line " investors can save up to 1.5 percent annually using direct plans." This difference in the returns between direct and regular plans is projected into the future. A prominent portal advertises that with the 1.5 percentage point difference, investors can earn an additional Rs 25 lakh in 25 years. However, less than five percent of mutual funds schemes have a 1.5 percentage point difference in direct and regular plan returns. The difference can be as low as 0.02 percentage points, as it is for some equity funds. This is another example of mis-representation.

3> there is a huge conflict of interest. Some mutual funds have started offering a portion of marketing budgets and investor education spends to portals selling direct plans. A recently launched direct plan platform made it a pre-condition for mutual funds to commit a minimum annual budget for featuring their schemes as a top investment idea. Aren’t RIAs and such platforms supposed to give unbiased advice?

SEBI needs to ensure that there be no commercial arrangement between the manufacturer and the portal to avoid this conflict of interest. It should also prevent the misuse of investor education budgets for such purposes.

The Direct plan eliminates a #financialadvisor who plays a vital role of educating the investor on how to achieve their financial goals. He evaluates the risk taking ability of the investor and based on the risk taking ability of the investor suggests the right investment strategy. The advisor considers the long term and short term financial goals, investment tenure, age , expenses, family status and current financial responsibilities before formulating an investment strategy. The #financialadvisor completes a thorough analysis of market conditions. Then recommends investment options. Advisors also stay abreast with the latest financial news and trends to ensure they offer relevant advice. After analyzing the possible investment options of the customer, the #financialadvisor plans a suitable investment strategy. This involves combining different investment options to diversify the portfolio to minimize risks and maximize returns. Helping investor to diversify the portfolio. #financialadvisor also maintains records.

By opting for a direct plan an investor might save on the expense but there is no guarantee that he will make money. Recent fall in the market has proven this.

Usually, when people select a scheme themselves, they do so based on its performance. They don’t consider that past performances may not be sustained. Evaluation of schemes is a function of various attributes of the schemes, e.g. scheme objective, investment universe, the risks that the fund is taking, etc. This requires the investor to put in time and effort. The investor also needs to have the requisite expertise to be able to understand the features and nuances as well as the ability to analyse and compare from among many options. A #financialadvisor would be qualified and trained for such a job.

More important than investing in the best scheme, it’s important to invest in a scheme most appropriate or suitable to the investor’s current situation. Though the investor’s situation is best known to the investor, a good #financialadvisor would be able to ask the right questions and put things in perspective.

Once the portfolio is constructed, regular monitoring of the scheme characteristics and portfolio is required, which is an on-going job. An #financialadvisor helps you review these schemes too.

When you want a job done right, you usually hire a professional to get the best results. The same can be said for managing your finances. While you may have some ideas about what types of investments to own, a financial advisor can offer you professional expertise and insight you may not have. Magazines, cable television and websites produce a wealth of investing information on a daily basis, but do you really have time to evaluate it all to make the best investment decisions?

If you're a new investor, a #financialadvisor can help you determine the proper asset allocation to fit your lifestyle. If you currently have an investment portfolio, a #financialadvisor can evaluate your existing investments and determine if they are still appropriate for meeting your short- or long-term goals.

Remember, a #financialadvisor has the time, knowledge, research tools, expertise and experience you may not have. After all, investment planning is his or her full-time job.

  Like a doctor is necessary in illness, a right advisor is necessary in investent if you wish to make money at the end of the day.