Direct Mode of Investment is DUMB!

The retailer is always seen as the money making Shylock, who has no scruples as long as it makes money FOR HIM – irrespective of businesses or products. Just think of the vegetable seller in times of onion crisis (which happens with a twice a year regularity) and I am told about the avarice of the retailer who hoards it and makes double the money or for that matter any ration shop owner who now sells almost everything. It’s no different in the Mutual Fund industry either.

Most times, and especially in recent times, I have come across articles by experts who extol the virtues of the direct route in mutual fund investing and have the same old tattered argument of the differential in the expenses that the two modes have. Let’s try and understand this first.

Mutual fund units today have a direct and a regular option in almost all variants, be it growth or dividend or whatever else. The regular option is through an intermediary like an Independent Financial Advisor (IFA) or maybe a bank’s code or perhaps a national distribution house. Upon a cursory scanning of the NAV of the schemes, it’s clear that the NAVs of the direct schemes are higher than the regular plans. AND this is the one and only clinching argument that the proponents of the direct scheme have provided.

This is the most warped argument for advocating avenues of investment, product choice and financial planning that anyone can come across.

If choices are limited only to the dimension of costs and expenses, it will perhaps make sense to teach our children at home, grow our own vegetables and perhaps even raise our own poultry.

Even though the parallel for the cost logic is established, somehow to a person it seems evaluation and allocation of solutions in the mutual fund space is simply restricted to the comparison of NAVs from the various sites, evaluate a few returns, check out a few portfolios and that’s it. But in reality, is it that simple? Even for the very basic advisor advising a retail investor, it takes a lot than just a cursory glance through websites and portfolio details. They would have handled many scores of investors and bring in experiences and feedback which will be an amalgam of these. They would have attended meetings organized by fund houses that would be instructive of the advantages of the schemes and by attending these meetings would have a far better understanding than the client on what will make a particular product score over others. And even more important than all this is the constant interaction they would have with peer groups. And as anyone in the work space will confirm, 

this amalgam of experiences from manufacturer’s, fellow advisors and clients will provide a perspective far superior to what an individual will bring to the table.

 There are skeptics who will point out that the above is not uniformly applicable to every advisor. Of course it is not. But this is not a binding arrangement. If the chosen advisor is not working out, the advisor can be changed. All of us have heard/experienced horror stories about some doctor, lawyer, chartered accountant what have you but when did these instances make the profession of medicine, law or accounting bad?

Apart from that, the cases for expenses are only applicable for staying in a fund. But who stays plugged into a single mutual fund scheme for life? It is the advisor who will understand the investor’s requirement, structure a solution and explain the benefits and pitfalls. Whenever a course correction is required it will be provided. Free of cost. For providing all these, a minor charge would have to be paid to the advisor and this charge is a lot less than the cost of errors of commission and omission.

And in all this I have not even picked up the issues of convenience and backup services. If these were to be added, then the option of investing through the advisor route will become the best and only mode for investors.