Direct Mutual Funds Make Sense Only For Savvy Investors..!

Direct Mutual Funds Make Sense Only For Savvy Investors..!

In tightening the rules for mutual fund houses to enhance disclosure, Share Market and mutual fund regulator SEBI fulfils one regulatory dharma but hurts another: that of developing the mutual fund industry.

 SEBI must ensure that it does not kill the distribution business & defeat the goal of making mutual funds a vehicle for mass investment.

Fee-based investor advice is ideal, but in India, distribution is key to spread the investing habit.

Encourage competing fund houses to offer different distribution models to investors: the present one, in which costs are part of the overhead expenses, explicit fees & zero charges when investors buy online directly from a fund house.

The education arising from such competition is what will benefit investors.

The new rules mandate the fund company to clearly mention the actual commission paid to distributors in the consolidated account statement that is given to the customer.

It should also show the expense ratio of both the regular and direct plans of a scheme that an investor is invested in.

The new rules, as Mr. Dhirendra Kumar of Value Research argues, will create a situation wherein distributors bring in new customers but as soon as customers turn profitable, they switch to direct plans.

However, direct plans make sense only for savvy investors. In a country that lacks financial literacy , distributors are needed to push mutual funds at least in the medium term. The regulator should invest in improving financial literacy before any backdoor attempt to push direct plans or switch to a fee-based model, as proposed earlier by a government committee on investor awareness and protection.

Savers need to diversify their saving products away from a narrow focus on fixed deposits and small savings, now that these rates will move frequently in line with the yield on government bonds. Investors also need better disclosures in insurance schemes.

A lenient regulatory regime allows insurance agents to charge hefty upfront commissions. It is unfair to investors as they are often in the dark about how much of their premium goes towards insurance. That must change.

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