Should I Invest Directly in Mutual Fund or through an Advisor?

The mutual fund scheme basically comes in two options – a Regular Plan (broker/agent) and a Direct Plan (self). When given options, we are easily confused.

To clear the confusion, this article will show you the insider view from the mutual fund companies and also the pros and cons of the mutual fund regular and direct plans.

If you are investing in mutual fund schemes directly, you will be charged less management fees by the mutual funds company. Therefore your returns in direct plans will be slightly better than the returns you make in regular plans through a mutual fund broker.

So you may want to know, “How to buy mutual funds without a broker or agent”.

But before that, I request you to consider this question:

Should I invest directly in a mutual fund to avoid the mutual fund brokerage or through an agent/broker for convenience?”

Table of Contents

1)Mutual Fund Direct vs Regular plan.
a.Why invest in a Mutual Fund Direct Plan without a broker?
b.Why invest in a Mutual Fund Regular Plan through a broker/agent?

2)Checklist of Services a Mutual Fund Agent should provide.
3)Checklist to buy Mutual Funds without a broker.
4)Evaluate both the options.
5)SIP through Agent or Direct?
6)A BONUS TIP

a.Mutual Fund Agent vs. Mutual Fund Advisor

7)A word of caution: How to select the right Mutual Fund Broker/Advisor?
8)Final Note

1) Mutual Fund Direct plan vs. Mutual Fund Regular plan

Here is the difference between investing in a regular plan and a direct plan.

First, let’s discuss in detail and compare the advantages of investing directly in mutual funds with and without a broker.

a) Why invest in a Mutual Fund Direct Plan without a broker?

The only logical justification an individual can give for choosing a Direct Mutual fund investment plan is that there is a reduced Total Expense Ratio (TER)/Mutual Fund brokerage commission.

If you choose a Mutual Fund Direct Plan, over a long period of time, the amount that goes to the Mutual Fund broker appears to be a quite good sum of money.

The average Expense Ratio of a regular plan and direct plan across various fund categories is tabulated below.

Thus the difference value is the amount you will add to your return when you invest in a mutual fund direct plan without an agent/broker.

How much is the mutual fund agent commission?

The difference in expense ratio between the Regular plan and Direct plan is the brokerage commission that goes to the mutual fund broker/agent. From this, we get the mutual fund agent commission rate which is at – 0.5% to 1% of your investment value.

This is the percentage as of 31st March 2019, but the percentage of the expense ratio and mutual fund broker commission is reduced by SEBI.A recent notification from SEBI to all the AMC’s has influenced a reduction in the total TER and also specifically the mutual fund agent commission.

So the mutual fund agent commission will become lesser than the existing 0.5% to 1% in the very near future.

b) Why invest in a Mutual Fund Regular Plan through a broker/agent?

A professional financial advisor or a financial planner can bring a potential difference in your return. A mutual fund broker/agent can help you to manage your mutual funds more efficiently from his knowledge through experience.

Since a mutual fund broker/agent works inside the market he is well aware of the nature or quality of a mutual fund. It is crucial to choose the right mutual fund, for which the strong experience of a mutual fund broker/agent can come for help. A mutual fund broker also monitors the stock market continuously and is capable of giving timely advice that can change the game.

Another important reason to go with a mutual fund broker/agent is the asset allocation strategy and rebalancing service which is very important to reduce the risk factor.

These are the general advantages you can take from the mutual fund broker/agent.

Let’s see the other advantages of investing through an advisor.

1.Convenient

Investing in mutual funds isn’t as easy as you think. You have to assess your profile based on your financial needs, risk, and then invest in the mutual funds that fit your needs. This is a time-consuming process. A mutual fund advisor has better knowledge of mutual funds and can find the best place to invest the funds. This way investing in regular mutual funds is more convenient.

2.Regular review

As an investor, it is hard to keep track of the portfolio and do continuous reviewing. But a mutual fund advisor regularly watches over your profile. Also, you get advised on rebalancing your portfolio when the need arises. Hence if you choose a regular plan, this becomes easier.

3.Professional help

Mutual fund advisors have in-depth knowledge of mutual funds and can give you the best professional advice to help you earn higher returns. But if you opt for direct plans you will have to rely on your own knowledge. Hence if you opt for a regular plan you benefit.

4.Services

There are some value-added services provided to you in case you opt for a regular plan. The services are such as keeping track of investments, providing tax proofs during tax filing, aid in redemptions, etc.

Are you planning to invest in mutual funds during this economic crisis/corona crisis but don’t know if you have to do it through a financial planner?

“The only true wisdom is in knowing you know nothing.” ― Socrates

Who do you think has better knowledge and experience of mutual funds?

Whom do you think can make better decisions on mutual fund investments?

How are you planning to invest? Through a financial planner or by yourself?

As you would have read a little about the financial planners, you would now know if it’s worth investing through a financial planner or not.

If you have a certified professional financial planner who is trustworthy, accountable, with credentials (Qualification, experience, and achievements) and credibility (positive reviews and ratings), won’t you choose him while investing through mutual funds?

What is the benefit of having a financial planner?

They can make your work easier and stress-free. They can add more value and also help you quickly achieve your financial goals.

They deal with:

• Risk assessment and management
• Rational decision making
• Saving money

How is it that they help you during this economic crisis/corona crisis?

I. Financial planners can help you create a coronavirus financial contingency plan

List your mediclaim policies, ensure family coverage and COVID 19 coverage, prepare for emergencies, and create an information vault. This is to safeguard you and your family in advance.

To know more read: coronavirus financial contingency plan.

II. Financial planners guide you on investments

The quick decisions you may take during the corona crisis are

• Withdrawing to avoid further losses and
• Timing the market bottom.

Quick decisions may not always be the right decisions. Financial planners guide you to make the right decisions. Now you are to stay invested. If you need money for an urgent need, use emergency funds, debt investments and if you have no other choice, go for the EMI moratorium.

For more info read: How to take advantage of the coronavirus crash.

III. Financial planners help you recover faster and better from the Stock market crash.

There are three ways it is done.

• Through a portfolio revamp

Financial planners advise, moving funds from poor-performing into better-performing investments. This is portfolio optimization and it has worked in the past. This is also a strategy to recover faster from the stock market crash. Do you think it is a need to redeem and reinvest now?
To know more read: How to revamp for faster and better results.

• Through a portfolio rebalance

Financial planners also help with this, as it is a crucial part of reducing risk. After a stock market crash, the asset allocation would have changed. Then you are supposed to bring it back to the original asset allocation. This is portfolio rebalance. For more, read: How portfolio rebalance is done.

• Through a proper decision on SIP

What are you supposed to do to your SIP’s?

Two experiments were conducted with three categories of investors, each of them who chose one among the following options. One to stop, one to continue and another to increase SIP (all during the market fall).

In both the experiments, the one who chose to increase SIP during the market fall, earned the highest portfolio value.

What happened?

• The one who stopped SIP, recovered slower.
• The one who continued SIP, gained better than the one who stopped it.
• The one who increased SIP, gained more than the rest.

Hence Financial planners suggest increasing SIP as it helps you gain the highest portfolio value.

For more, read: How to play smart with your SIP.

You are supposed to do these before the market recovers, for a faster recovery.

On a scale of 10, how would you rate yourself and a financial planner making mutual fund investments?

If the financial planner earns a higher point compared to you, then it is time for you to consider choosing a financial planner while investing in mutual funds.

I have created a detailed check-list of the services that a mutual fund agent must provide to the investor.

2) Checklist of services a Mutual Fund Agent should provide

A professional mutual fund agent or broker needs to provide a list of services to their clients. As an investor, you need to make sure whether your mutual fund agent is providing these services or not. You need to hire a mutual fund agent who is capable and willing to provide the below services.

i) Mutual Fund Portfolio Reports:

Mutual Fund Agent needs to provide you a consolidated report periodically. Your Mutual Fund Agent should be able to give you different types of reports like absolute return report, annualized return report, profit/loss report, dividend report, transaction report, Investment Summary report.

You may need a detailed report at times, and you may need a summarised report at times. You may want to check the total dividend received for a particular period by requesting a dividend report.

Your auditor may request a report for the total investments made during the year. Before engaging a mutual fund, ask for these kinds of sample reports from him.

ii) Capital Gains and Advance Tax:

The mutual fund agent/broker needs to send you a capital gain report comprising both short-term and long-term capital gains. You may need this during the advance tax payment time and at the time of filing the income tax returns.

iii) Portfolio Online Access:

If a mutual fund agent provides online access to your investment portfolio, then you should have a provision in your online access to generate these reports.

iv) Income tax Scrutiny:

Income Tax Department at times may ask you about the details/sources for some investments. You could have made an investment 6 years back and withdrawn the same 3 years later and reinvested the redemption proceeds in another scheme.

Your mutual fund agent must be able to give you this past history even after 6 years. Your Mutual Fund Agent should maintain records even for the closed investments. This is something that is very important for an HNI client.

v) Paperwork:

When you are investing in a mutual fund, there is a lot of paper-work and documentation involved. KYC completion and Mutual Fund Application fill up are a few things your mutual fund agent will assist you. He also does the legwork for your redemptions.

The mutual fund application transaction form process is a bit more tedious in the case of SIP or STP. As a mutual fund agent, he/she will be well versed in all these formalities.

vi) Follow up, update, and corrections:

Some transactions like SIPs and STPs need to be followed up for on-time execution. We may need to update the mutual fund records from time to time with details like Aadhar, new bank details, etc.

There may be some human errors like a misspelling in the nominee name or some omissions. These things need to be escalated to the respective customer care team of mutual fund houses to get them corrected.

vii) Composite portfolio management:

Your mutual fund scheme will invest in firms from various backgrounds like automotive, information-technology, health-care, infrastructure and etc. Every sector will have variable influence in the market, and so it is necessary to see that your fund exposure to a particular sector does not go beyond a specific percentage.

A mutual fund agent should be able to identify the risk of heavy or weak fund exposure to a particular sector. If you have invested in 4 or 5 mutual fund schemes, then you should spend a lot of time to evaluate the fund exposure now and then.

For example, if your fund exposure is heavy in the IT sector and very weak in health-care, it is definitely an additional risk.

In this case, a competent mutual fund advisor must choose to invest/buy a mutual fund scheme with good exposure to the health-care sector and withdraw/sell from the mutual fund scheme which has average exposure to the IT sector to eliminate the risk and make a moderate portfolio.

If some one is investing directly in 4 or 5 mutual funds, then getting a consolidated portfolio for the underlying stock investments with a sectoral allocation is not possible. If you are investing through a good mutual fund agent, his online investment platform will be equipped with these composite underlying portfolio.

This composite underlying portfolio will help you choose the right mutual fund scheme to add in or remove from your mutual fund portfolio.

viii) Transfer of ownership:

In case of the death of the investor, the mutual fund ownership should be transferred to the nominee or legal heir. This is a very complex procedure that may eat a lot of your productive time.

When you hire a mutual fund agent, he can take the responsibility to transfer the ownership to the nominee as per the will of the investor.

ix) Auto-debit bounces in SIP

In SIP schemes the possibility of auto-debit bounces is not negligible. Such incidents might make you bounce between your bank and your mutual fund house.

It can make you stressed out easily because your bank will point the mutual fund company as the responsible one and your mutual fund house will point the bank as the responsible one.
A mutual fund agent will be able to coordinate these things easily.

In all these services, the mutual fund agent/broker needs to provide you without any cost as he is getting paid by the mutual fund companies in the form of commission. Also, you are looking from him, only transaction facilitation not investment advice.

3) Checklist to buy mutual funds without a broker/agent?

There is nothing new you have to check to when you invest in mutual funds without a broker. You only have to make sure to do everything in the checklist of services a mutual fund broker should provide by yourself.

We will discuss how to buy mutual funds without a broker/agent now.

If you have decided to invest in mutual funds directly, then you can choose the direct plans of mutual fund schemes instead of regular plans. There are 2 major ways by which you can invest in mutual funds directly without a broker.

You can walk-in to the branch office of the mutual fund house and fill up the application forms yourself. If you are planning to invest in 4 or 5 mutual fund companies, you need to personally visit each mutual fund company’s branch office. You can visit the website of the mutual fund company and check the procedure for online investment and follow them. You need to do these separately for each and every mutual fund company. Some mutual funds companies need the initial forms to be sent physically to them for getting the online access.

Apart from choosing from a direct plan vs. a regular plan, there is a difference between a mutual fund agent/broker and a mutual fund advisor. Both of them may appear to be the same, but the line that separates an advisor and an agent/broker is explained for you as a bonus.

4) Evaluate both the options

Now you need to weigh both the options of investing in mutual funds directly and with the help of a broker/ an agent.

Can you do all the things mentioned in the checklist by yourself? If your answer is yes, then you can invest directly without a broker/agent. If your answer is no, then you need to go through a broker/agent who is capable to provide you all the above services.

Also, bear in mind to check if the things you do & the time you spend to do it yourself is really worth enough for the benefit you get by way of reducing expenses or increasing returns.

5) SIPs through Agent or Direct?

The same points we discussed above for general mutual fund investments are applicable for SIP investments as well.

SIP investments involve more paperwork, more follow on bank auto-debit, reconciliation and renewal reminders.
So you need to consider your

• ability to do these,
• willingness to do these and
• time availability to do these

6) A Bonus Tip*

First, understand the difference between mutual fund agent and mutual fund advisor,

Mutual Fund Agent Vs. Mutual Fund Advisor

Mutual Fund Agent

A Mutual Fund Agent provides services on your mutual fund investments:

• Facilitates the mutual fund transaction.
• Provides after sale/investment services like regular reports.
• Provides support when you withdraw.

For providing these services, Mutual Fund Agent is not supposed to charge any fees because he gets a decent commission/brokerage from mutual fund companies.

Mutual Fund Advisor

A Mutual Fund Advisor provides advice on your mutual fund investments:

• Study & understand your financial requirement.
• Educate you on mutual funds.
• Recommend the mutual fund scheme which fits into your requirement.
• Review your mutual fund investments periodically.
• Gives you the experience knowledge of good and bad market timings.
• Transfer of the mutual fund ownership to your heirs on demise.

You are supposed to pay certain fees for hiring an advisor.

As this article is about whether you should invest directly in Mutual Fund or through an agent, I am not discussing more on the services and importance of an investment advisor here.

An agent/broker is someone who has some stocks and just wants to sell it to you, but an advisor understands your needs and helps you to get what you need.

If you want more personalized advice, you can get your free appointment for 30-minute complimentary financial plan consultation here.

7) A word of caution:How to select the right Mutual Fund Broker/Advisor

If you have decided to invest through a mutual fund broker, the following tips will help you choose the right mutual fund broker for you.

• Carefully check if the mutual fund agent/broker you are going to hire will provide all the services listed above. Before hiring him, verify his service track record by checking testimonials given by his existing clients. Also, you can get a few references from his existing clients and speak to them and check the agent’s overall services.
• Many mutual fund brokers/agents provide false promise when getting business and they will not turn up for after-sale service. So you enquire about the agent’s after-sales service track record thoroughly.
• Don’t try to get Free Advice from the mutual fund agents on your investments. Then he may advise you to take a scheme where he gets a higher commission. You need to be aware of this conflict of interest. You need to get paid advice and get free (for you and commission-based for the agent) service for investment facilitation and follow up services.

What if you want to invest in mutual funds directly?

These things can be done easily online. If you are an organized investor and can manage your investments you can do these by yourself. You can request the fund company to move your investments from the regular to the direct plan. Then all your existing investments will be redeemed and new investments will be made in the direct plan.

You are responsible for two things:
1. You may have a long or short term capital gain. If so, you have a capital gain tax implication, which is one time and you are liable for it at the time of redemption.

2. Most equity funds carry an exit load for redemption within one year. If you have any investments less than a year old, do not redeem them so that you don’t have to pay the exit load. Once your investments have completed one year, you can redeem them.

Final Note

Needless to say, LOW COST alone should never be the only factor to influence mutual fund selection. It is not also the story you tell yourself to justifying your decisions.

Before putting an end to the confusion on deciding about direct vs. regular plan, I’ll tell you a small story that is indirectly related to this confusion. You ever noticed how people respond when there is a variation in body temperature.

Some people go to a Doctor, do the necessary check-ups, and take the physician prescribed medicines. Whereas, some people think they know what they are doing and straight away go to a pharmacy, ask for medicines they prescribed for themselves and then get into much bigger troubles.

I hope you got the point!

You are going to have a long-term relationship with the agent/broker or advisor. So you need to pay enough attention to selecting the right agent for you.

Now you have understood why and how you need to select a mutual fund agent to facilitate your investment transactions. Before doing investment transactions, you need to have an investment plan which is customized to meet your financial goals.

Which one do you prefer, investing directly in a mutual fund or through an agent? Why? What are your views on this? Please share it in the comments section.

If you want to create a customized financial plan, then I would suggest you test-drive our services by opting for