Cost is important, but so is advice

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Every month, mutual fund (MF) investors get their consolidated account statement (CAS), with details of schemes, amount invested and their current value. These details give the investor an insight on whether his investments are growing or falling. They also allow the investor to take the critical decision of staying or exiting a scheme. For example, if the benchmark index has risen 20 per cent in six months, but his equity diversified fund has fallen 10 per cent, it is time to introspect whether he should stick around in the same scheme or exit.

The market regulator, the Securities and Exchange Board of India (Sebi), wants to take this idea forward. It wants MF houses to give information on brokerage paid to distributors, total expense ratio and even comparison with a direct plan of the same scheme, to the investor on a half-yearly basis.

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If you have a portfolio of Rs 5 lakh divided between three schemes, the fund houses will now have to tell you the total expense ratio (TER) of the scheme. They will also have to give the TER of the direct plan in the same scheme. So, if the fund houses are charging you an average TER of 2.5 per cent and the direct plan's TER is 1.7 per cent, the difference is a good 80 basis points - an important number if you are investing for the long term. Obviously, Sebi is pushing investors towards direct plans.

Says Rajiv Deep Bajaj, chief executive officer (CEO), Bajaj Capital: "Disclosures are welcome but should be complete. We should also inform investors - 'MFs are subject to market risks, you may need services of a professional financial advisor before investing' or 'Direct investments should be considered only by informed investors who can manage market risks on their own'."

While fund houses refused to comment on the regulator's new guidelines, there is considerable amount of discontent. Most believe too much of information might confuse investors. The CEO of a leading fund house says that more transparency is good, but too many changes in a very short time will only hurt collections and the asset management industry.

Dhirendra Kumar, CEO, Value Research, says: "If Sebi wants lower costs, it should lower the cost limit and expenses will instantly be lower. It's as simple as that. Instead, it has decided to structure the account statement in such a way that it is a thinly disguised invitation for investors to abandon fund distributors and switch to direct funds."

How does this information help you? If you have gone through a distributor, the 2.5 per cent TER translates into Rs 12,500 and a 1.7 per cent TER means Rs 8,500 - a saving of Rs 4,000. The net asset value of schemes is also impacted due to additional costs. So, the NAV of direct plans is higher than that of a regular plan. While all these additional details are good for investors, there are a few things to remember as well.

Don't exit the distributor/advisor in less than one year: Yes, if you have gone through the distributor, there will be an additional cost. But, if you have invested in the scheme for less than a year and you exit, there will be a number of additional costs. If there are capital gains, there will be a 15 per cent tax in case of equity funds. In case of debt funds, the capital gains will be added to your income and taxed in line with the bracket. Some fund houses have also put exit loads of one-three per cent on exits before one year. So, exiting before a year could mean being penny wise, pound foolish.

Are you a seasoned investor? Direct plans are made for investors who know how to do their own homework. Choosing an equity fund might be easier than a stock. But, it has its own problems. Sebi says MFs should give a disclaimer that past performance is not a guide to future performance. In fact, it has asked fund houses not to even advertise their past. But, most investors look at past performance before investing. And, during a bull run, even badly-managed schemes might do very well. So, unless you are someone who can do the necessary analysis, there is no need to go direct.

Redemption woes in SIPs: One of the main problems facing investors who are doing Systematic Investment Plans (SIPs) in equity schemes or equity-linked savings schemes (ELSS) is the tax aspect. The most common mistake they make while redeeming after a year or three years, in the case of equity-linked savings schemes, is assuming that all the instalments have become tax-free. No, they haven't. If you have made 12 instalments in a year, only the first one has become tax-free in month 13. Similarly, in case of ELSS, in month 37, only the first instalment becomes tax-free.

Says Hemant Rustagi, CEO, WiseInvest: "The equity culture in India is relatively new. And good MF advisors have hand-held investors even during bad times. While there might not be any monetary value attached to hand-holding, there is a lot of value for the investor during bad times."

According to him, a lot of investors in traditional instruments have turned to SIPs over the years, which makes a lot of difference to their retirement corpus.

While the market regulator's move is good from a transparency point of view, investors should only take the direct route if they are confident of managing it themselves.

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