When the mutual funds direct option was introduced, the media started making noise about direct investments. Currently it is only the big corporates which has gone direct – and a few well informed investors. The numbers are not adding up the way the media thought it would.
Let us look at the logic of going direct.
Look at a professional aged 50 years and having about Rs. 1 crore.
He / she presumably does not have enough knowledge to choose funds and allocate assets. So it is in bank fixed deposits, some ad hoc equity and some assortment of mutual funds in which he / she has invested.
At this stage he decides to look at options and finds the following available:
- Invest through ICICI Direct: ha here is the catch! Investing through a broker, or a banker, or some websites, MEANS they are the brokers, so YOU DO PAY. Indirectly, that is all. The asset management company pays the broker a trail of say 0.4% p.a. In case the broker is very big it might get a bigger trail – say even 1% p.a. and that is coming out of the clients charges.
- Use an adviser: Let us say the investor goes to an adviser and the adviser thinks that he will spend about 20 hours a YEAR on the client’s portfolio. Seeing it, analysing it, discussing with the clients, attending to panic attacks, and generally counselling. The adviser will charge anything between Rs. 1500 an hour to about Rs. 5000 an hour. So the fees charged could vary from Rs. 30,000 to Rs. 100,000.
In this case the client will have to do the execution himself. Go to the respective websites of the mutual funds and invest online – or offline. The client saves about Rs. 30,000 in the first year – and the amount will in general keep increasing (thanks to the impact of compounding).
The client has to think of the following :
Can the adviser really add value – like screaming against gold when the world is going into gold, or having the guts to say that ‘HDFC top 200 has not done well for 3 quarters, but will catch up’ or ‘look Templeton India Pension plan is a slow, boring, good value fund, but a tad expensive’ or the guts to say ‘FMPs are risky’.
Will the adviser be able to get a 1% alpha – i.e. instead of going through a non advising website if you were to go through a adviser will he get you an extra 1% return – in case of a 1 crore portfolio it means Rs. 1 lakh.
What about record keeping? I feel that www.valueresearchonline. com , or www.moneycontrol.com , or yahoo finance, myiris.com, …etc do a far far better job than broker websites.
Unless you have a portfolio of Rs. 5 crores, know the markets, and are willing to put in efforts, YOU SHOULD GO THROUGH an adviser. Ask him, trouble him, and either pay fees or invest through him. Of course if your portfolio is less than Rs. 50 lakhs, some advisers may want a combination of fees and execution trail.