An extra mile covered earns an extra buck. As the saying goes, an investor needs to put in that extra effort in order to earn that extra returns on his or her investments. This will soon be true for investors in mutual funds due to the recent investor friendly changes brought out by the Securities and Exchange Board of India (SEBI). According to the guidelines put forth by the SEBI, the mutual fund houses will have to provide direct plans in their existing and new schemes with a separate Net Asset Value (NAV) from January 01, 2013.
Until now, when an investor dealt directly with a fund company without going through a distributor, the money that didn't have to be paid to the distributor went to the fund house, adding to its margin of doing business. There was no particular advantage that the investor derived by doing things directly. But now that the guidelines direct the fund houses to come with direct plans with a separate NAV, such investors who walk the extra mile are sure to be benefited.
Under the direct plan the Total Expense Ratio (TER) could differ from one fund house to another depending on the corpus of the scheme. On the contrary, there could be a possibility that Association of Mutual Funds in India (AMFI) could formulate the TER on different asset classes which would then be followed by all Asset Management Companies. A direct TER (TER for direct plans in mutual funds) will be arrived at by deducting the distribution and commission expenses in a scheme. Apart from an upfront to the distributors, fund houses tend to pay 50 basis to 70 basis points trail commission in equity schemes. The commissions are lower on debt schemes. Thus, an investor may assume to benefit from a difference of at least 100 basis points in a direct plan.
We are of the view that, direct plans of mutual funds will go a long way in benefiting long term investors in mutual funds. Costs of distribution and commission will be eliminated from such plans of mutual funds thus, benefiting the investors in the long term. However, the investors should exercise such options only after they have thoroughly studied the different schemes of mutual funds. At present, there are more than 4,500 schemes to select from and so an investor who has not done his or her home-work may not be able to invest in the right mutual fund scheme depending on the risk appetite. This drawback of selecting the right mutual funds can turn out to be disastrous as not all schemes perform under different market conditions.
Thus, an investor who is unable to provide time and energy to study the different schemes offered by mutual funds, it becomes imperative for him or her to take professional help from experts in the mutual fund industry who provide unbiased service to the investors. Nonetheless, if an investor is able to make the right choices then he or she should go for direct plans and earn whatever extra, the mutual fund plan has to offer.