Benefits of investing via an advisor versus direct plans

Back in 2013, the Indian market regulator, SEBI, introduced direct plans for mutual funds, i.e. investors could invest directly in mutual fund schemes without having to approach a distributor or advisor. Though by design direct plans invest in the same instruments as regular plans, they offer a higher net return for the investors given that there is no expense related to the distribution, marketing or commission for the mutual fund. While investing in a direct plan, an investor needs to approach the asset management company directly or go to their website and use the ARN code option to carry out the investment transaction themselves.

Although the above logic clearly runs in favour of investing in direct plans, there are other factors to be considered for investors who may still want to invest through a financial advisor:

Active portfolio management

A financial advisor helps identify and prepare an asset allocation strategy keeping in mind the risk profile and financial goals of the investor. This is further supplemented by regular advice and portfolio rebalancing which many investors may not have the time or efficiency to carry out by themselves.

Too many mutual fund schemes

Even though SEBI has recently mandated mutual fund houses to reduce the number of schemes and consolidate various similar schemes into categories, it may still be an onerous task for an investor to determine the best mutual fund scheme to invest in, given that there are more than 20 mutual fund companies in existence! Deciding the best scheme and fund house can be a daunting task for an individual and thus, an advisor’s guidance may prove useful.

New investors

New investors into mutual funds have little, if any investment experience and it would do them well to consult an investment advisor especially in the early stages of investing. The advisor may guide them on selection – whether to invest primarily in debt schemes or equity schemes depending on the analysis of their investment goals and risk appetite. While diligent investors may have the capabilities and time to spend on regular portfolio rebalancing, new investors often rely on advice from others for their investment selection.

Thus, the old adage – ‘Cheaper is not always better’ is also applicable to direct plans of mutual funds. Investors can consider foregoing a part of their returns for regular sound advice on their investments without worrying about operational procedures or managing their fund themselves. However, care must be taken to ensure the right advisor is chosen as that can make a big difference in being able to get ‘average’ returns and ‘superior’ returns on your investments. Advisors that provide unbiased recommendations, without being influenced by factors like commissions earned,  provide good service and allow the investor a  peaceful night’s sleep.

Leave a Reply