Every mutual fund scheme in India (with a few exceptions) is currently available in two broad variants (or ‘plans’)- one, on which advisors are paid commissions, and the other, on which they are not. The second kind of plans are referred to as ‘direct plans.’ Direct plans are necessarily expected to have a lower expense ratio and a separate NAV. All else being equal, the direct plan of a scheme can be expected to give a better return.
To anyone who gets the mathematics of a direct plan, it can be a very alluring option. In the words of an investor whom I met, “It’s a no-brainer.” Personally, I believe that is important to understand and evaluate the downside before making a decision. To do so, I recommend asking oneself one or two questions.
The first question to ask is: Do I really need a financial advisor? To properly answer this question, it would help to list out what a financial advisor does, and what you would have to do if you did not have one (you may like to check out an earlier post on the role of an advisor). If necessary, have a chat with your advisor(s). If the answer is ‘no,’ then direct plans are a perfect option for you.
If, on the other hand, the answer to that question is ‘yes,’ then the next question to ask is: Would I benefit from having an advisor who charges me a fee? To clarify, while the overwhelming majority of financial advisors in India depend on the commissions they receive, there is an emerging breed of advisors that instead charge a fee from their clients for their advice. These are often referred to as ‘fee-only advisors.’ If the answer is ‘yes,’ then direct plans are an obvious choice for you.
In all fairness, though, the second question is not easy to answer, and would require you to reach out a few different fee-only advisors. Assuming you can identify some advisors whom you can trust, you would need to know the services that would be provided and those that would not. For instance, not all fee-only advisors have the ability to monitor a portfolio built around direct plans, and to provide performance and tax reports. At another level, you would need to analyze the cost benefit (i.e. comparing the fee with the benefit in costs from a direct plan).
As I see it, direct plans do not represent a free lunch, just a discount. Unless we can find a suitable fee-only advisor, these are best regarded as a self-service option.
