Benefit for direct investors in small MF schemes

Sebi guidelines will help the financial savvy and the ones still finding their feet in the stock markets.

The equity market regulator, the Securities and Exchange Board of India, has made it more profitable for direct mutual fund (MF) investors. In its recent guidelines, it has proposed to keep two net asset values (NAVs) in mutual fund schemes – one for the direct investor and another for the ones who come through distributors.

But, before going for the direct route, undertake a cost-benefit analysis. Though, the final difference in costs between a direct investor and one going through a distributor will only emerge when the numbers are actually declared by the fund houses, a little bit of number crunching can give us a ball park figure.

Currently, mutual funds charge up to 2.5 per cent as expenses. Add another 20 basis points to that and the investor will be paying around 2.7 per cent – the average expense for a smaller scheme of Rs 500-700 crore will be to the tune of 2.4 per cent.

Of this, for equity funds 1-1.25 per cent is charged as investment management fees, registration and transfer charges, custodian charges, investor communication (for printing half-yearly results), trustee fee, etc. All these will come to around 1.75-2 per cent. After all these expenses, the fund house will have 40-65 basis points that could be passed on to the investor.

For a larger size fund of Rs 3,000 crore, the numbers would be lower. The expense ratio for such schemes is to the tune of two per cent. So, direct investors will stand to gain very little in schemes that are managing large amounts. The savings will be from trail commissions that are paid to the distributors.

For someone who is investing Rs 1 lakh in an equity mutual scheme, the savings would be around Rs 500-700 annually. Direct investors were anyway exempt from paying any entry load (during the entry load regime). However, despite this benefit, still 95 per cent of mutual fund investors buy units through a distributor such as a bank, brokerage, financial planner and so on, say experts.

“At present, people don’t take the direct route because choosing a suitable mutual fund scheme and doing the necessary paperwork on their own is still quite a cumbersome process,” explains Jaideep Bhattacharya, managing director, Baroda Pioneer AMC.

From a retail investor’s perspective, there will be some savings. But what one needs to consider is – can they take the call on what is the best fund to invest in? The question is important because many put in money because some scheme is performing exceptionally well for a short period. And then get trapped in bad times. If you are unsure about the scheme, it is important that you should take professional help even at a cost.

Another move that will expand the investor base, is allowing people without a PAN card or a bank account to invest cash up to Rs 20,000 in MF schemes. At the moment, you need identity proof and bank account for any investment-related transactions. This move, fund experts say, will help people in Tier-IV, V and even VI cities.

Amar Ranu, senior manager (third party products), Motilal Oswal Private Wealth says the ones that are likely to take this route should invest in balanced funds, since they would be first-time investors. Within balanced funds, monthly income plans (MIPs) are a good option.

Investors can opt for both combinations – 65 per cent equity or debt – depending on their age and risk profile. In case of 65 per cent equities, the downside is higher in the present market conditions. In good market conditions, they do better than 65 per cent debt products.

Source: http://www.business-standard.com/india/news/benefit-for-direct-investors-in-small-mf-schemes/484240/