1st Jan 2023 will mark the 10th anniversary of the introduction of direct plan mutual funds. This article discusses whether their introduction has caused more harm than good for investors. About 46% of total assets are in direct plans (a good chunk of it is as institutional and HNI assets).
The honest answer to this question is we don’t know. There is no way to measure or ascertain this unless we take anecdotal evidence seriously (which we will not). Direct plan mutual funds have led to mixed results like every rule change.
They have resulted in higher returns for true DIY investors. Before Jan 2013, a DIY investor buying units direct from fund houses was paying the same expense ratio as someone investing “through” a distributor. The AMC happily pocketed the additional fees.
They have enabled SEBI to create investment advisor regulations and stopped registered advisors from double-billing investors – once for advice and once for commissions. Registered advisors can only recommend direct plan mutual funds to their clients.
Of course, many advisors have found a way to ensure that the income is not reduced by charging a fee as a percentage of assets, having a distribution arm, getting commission from products not regulated by SEBI, etc.
Direct plans and Investment advisor regulations have, in principle, paved the way for conflict-free advice, as more than 1000 of our readers can attest by working with our curated list of fee-only advisors.
Naturally, investors choosing funds on their own would have led to mistakes, but this doesn’t mean all regular plan recommendations were suitable or well-intended. There is no way to meaningfully measure either.
In our opinion, the biggest harm has not been direct plans but direct plan portals with their “free” algo-based recommendations. Again this can’t be measured and remains speculation.
So have direct plans caused more harm than good? Since there is no data, it depends on you who ask!
- The distributors would say, well, we know what they would say.
- Most registered advisors are probably unhappy because it reduces their earning potential
- AMC guys don’t care how the AUM comes as long as it comes. They would like to fan all fires at the same time.
- No investor would complain about getting more returns. I am one of them and would certainly vote for “good”.
Some may say that direct plan exposure has not increased as much as it should. Perhaps, literacy and change take time. More importantly, affordable and conflict-of-interest-free advice in India is next to non-existent.
The only practical way (in our opinion) to address this is to lower the barrier to becoming registered advisors and independently elevate the status/respect of mutual fund distributors—more about this in another article.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
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