Should I Invest Directly in a Mutual Fund or through a Broker/ Distributor?

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The mutual fund scheme comes in two options – a Regular Plan (broker/agent) and a Direct Plan (self).You can also invest through third
party applications in direct and regular modes.

When given options, we are easily confused.

In this article, we will clarify all your following questions, Should I invest in a mutual fund directly or through an agent?

• Is it better to buy mutual funds directly?
• Direct or regular mutual fund which is better?
• What is the difference between direct and regular mutual funds?
• What are the things to look for before selecting a mutual fund broker/agent?
• How to invest directly in mutual funds without a broker or agent?

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.

In regular mutual funds, the expenses will be slightly higher. When you are investing in the direct mutual fund you save the investment cost but the time and effort you put in are higher.

So you may want to know, “How to invest directly in mutual funds without a broker”

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 options.
5.SIP through Agent or Direct?
6.A Bonus Tip

• 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, we will discuss in detail the pros, and cons of investing directly in mutual funds without a broker.

Pros and cons of direct mutual funds:

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 direct mutual fund investment 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 are tabulated below.

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

How much is the mutual fund agent commission?

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

It is the percentage as of 31st March 2023, but the percentage of the expense ratio and mutual fund broker commission is reduced by SEBI. A recent notification from SEBI to all the AMCs 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.

Just to save this 0.5% to 1%, if you as an investor invest in direct mutual fund schemes over regular mutual funds, there is a high probability, 

• the mutual fund scheme selection can go wrong and 
• also discontinuing SIP or exiting investments when the market crashes can happen and 
• cause you to get poor returns from your direct mutual fund schemes than a good regular mutual fund.

At times, because of investing in wrong direct mutual funds by investors, there is a possibility to lose even the principal.

Are you thinking about diving into the world of direct mutual fund investing? 

Cool! It definitely has its perks, like skipping out on those pesky distributor commissions and potentially snagging better returns with lower expense ratios. But before you jump in headfirst, let’s chat about some of the challenges you might encounter along the way:

i) Feeling Lost Without Guidance:

One of the biggest hurdles with direct mutual fund investing is feeling a bit like a ship without a compass. Without a financial advisor or intermediary to lean on for guidance, you might find yourself navigating the choppy waters of the financial markets all on your own.

ii) Getting Tripped Up by Jargon:

Ever feel like you need a translator just to understand all the financial jargon? Yeah, us too. Investing directly means diving deep into fund prospectuses, performance metrics, and risk factors, which can feel like deciphering a secret code sometimes.

iii) Playing Portfolio Manager:

Who knew being your own boss could be so… stressful? With direct investing, you’re in charge of managing your own portfolio, from asset allocation to rebalancing. It’s like being the captain of your own ship, but with a lot more spreadsheets.

iv) Riding the Emotional Rollercoaster:

Ah, the joys of emotional investing. Without a steady hand to guide you, it’s easy to get swept up in the highs and lows of the market. Fear, greed, and overconfidence can lead to impulsive decisions or panic selling when things get rocky.

v) Missing Out on Resources:

Ever wish you had a secret stash of insider knowledge? Investing directly means you might miss out on access to research reports, market insights, and educational resources that could help you make smarter decisions.

vi) Forgetting to Check the Rearview Mirror:

Remembering to keep an eye on your investments is key, but it’s easy to let things slip through the cracks when you’re flying solo. Without automated tracking tools or personalized reports, you might miss important changes in your portfolio.

vii) Risk? What Risk?:

Managing risk is like walking a tightrope without a safety net. Without the guidance of a pro, it’s tough to implement risk management strategies like diversification or asset allocation effectively.

viii) Drowning in Paperwork:

Let’s face it, paperwork is nobody’s idea of a good time. Investing directly means you’re on the hook for keeping track of all your transactions, tax documents, and investment statements. Cue the paperwork pile-up!

So, there you have it! While investing directly in mutual funds has its perks, it also comes with its fair share of challenges. Before you take the plunge, make sure you’re prepared to tackle these hurdles head-on. After all, navigating the world of investing is all about finding your sea legs and staying afloat in rough waters.

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

Understanding Regular Mutual Fund Investments:

So, what exactly are regular mutual fund investments?

Well, it’s pretty straightforward. When you opt for the regular method, you’re teaming up with intermediaries who provide personalized advice, guidance, and ongoing support. These folks, whether they’re financial advisors or brokers, are like your personal GPS in the financial jungle, helping you navigate and make smart investment decisions.

i.) Professional management

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.

You get access to professional guidance tailored to your unique goals and risk tolerance. Think of it as having a seasoned coach by your side, helping you draft a winning playbook for your investments.

ii.) Regular monitoring

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.

iii.) Asset allocation

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 more advantages you can take from the mutual fund broker/agent.

Let’s see the other advantages of investing through a mutual fund advisor in India.

iv.) Convenient

Investing in mutual funds isn’t as easy as you think. You have to assess your profile based on your financial needs and risk, and then invest in the mutual funds that fit your needs. It 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.

v.) Regular review

As a mutual fund 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.

vi.) 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 mutual fund direct plans you will have to rely on your own knowledge. Hence if you opt for a regular plan you benefit.

Let’s not forget about peace of mind. With intermediaries handling the heavy lifting, you can rest easy knowing that your investments are in capable hands. They’ll keep an eye on your portfolio, make adjustments when needed, and keep you informed every step of the way.

vii.) 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.

viii.) Hand-Holding

The investment process becomes a breeze. Instead of feeling overwhelmed by all the financial jargon and market complexities, you can lean on your intermediary for simplified explanations and expert insights. It’s like having a trusted friend who’s always ready to answer your burning questions about where to put your money.

During 2020 market crash, most of the media hyped about market crashing further and will not recover for next 10 years. But within 10 months market recovered and touched all-time high. During this period, direct mutual fund investors are the worst affected.

Regular mutual fund investors got guided by the mutual fund distributors and brokers. Because of the hand-holding provided by the mutual fund brokers in the regular mutual fund schemes, investors were able to stay the course and create wealth.

ix.) Summary of Services

Additional Benefits you get:

• Easy account opening
• Easy portfolio & tracking and monitoring
• Safe and secure way of transaction through the National Stock Exchange platform.
• Monthly Webinars with Investment Experts
• Research-based scheme selection for investing
• Tax Planning
• Dedicated Financial Planning Executive
• Action Plan and Support during Market Crash and Boom
• Customised need-based investment plan
• Existing Portfolio & Asset Allocation Analysis
• Wealth Road map and blueprint.
• Choosing the asset allocation.
• Choosing the right scheme.
• Revision of schemes in the portfolio.
• Periodical asset allocation rebalancing.
• Multiple Reviews

c) Investing through Mutual Fund Direct Platforms Vs Investing through Broker in Regular Mutual Funds:

There is no Free Lunch. Direct Mutual Fund Platforms: Are they REALLY Free?

Direct Mutual Fund Platforms may help you reduce your cost. Will they help you generate better post-expenses returns from direct mutual fund schemes?

End of the day, what matters?

• Reduced expense ratio without any support for getting better returns from direct mutual fund schemes

OR

• Better post-expenses return from Regular Mutual Fund Schemes.

Looking at just the Price / Expense Ratio may lead you to take a biased decision.

Please check the value you get for the price.

How can a financial planner assist you in recovering your financial losses due to economic crises or market crashes?

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

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

Who 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 financial planners, you will now know whether it is worth investing in a financial planner or not.

If you have a certified professional financial planner who is trustworthy, and 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?

I. Financial planners can help you create a financial contingency plan during the economic crisis

List your Mediclaim policies, ensure family coverage, prepare for emergencies, and create an information vault. It is to safeguard you and your family in advance.

II. Financial planners guide you on investments

The quick decisions you may take during the Financial crisis are

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

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

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 and move funds from poor-performing into better-performing investments. It is portfolio optimization and it has worked in the past. It 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 with your SIPs?

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 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 checklist of the services that a mutual fund agent must provide to the investor.

2) Checklist of services a Mutual Fund Agent should provide

You should know which broker is best for you before investing in a Mutual Fund.
A professional mutual fund agent or broker needs to provide a list of services to their clients.

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

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 on 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:

The 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 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 paperwork and documentation involved. KYC completion and Mutual Fund Application fill-up are a few things your mutual fund agent will assist you with. 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 of the nominee’s 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, etc. Every sector will have variable influence in the market, 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 evaluating 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 someone 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 portfolios.

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. It 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 to the mutual fund company as the responsible one and your mutual fund house will point to 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 a commission. Also, you are looking at him, only for transaction facilitation, not investment advice.

3) Checklist for how to buy mutual funds without a broker?

There is nothing new you have to check 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.

• High NAV
• Safe Investment
• Control over investment

There are 2 major ways by which you can invest in mutual funds directly without a broker.

i.) Direct visit to the branch office:

You can walk into 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.

ii.) Buy mutual funds online:

Can I invest in mutual funds online?

Yes, you can.

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 online access.

Benefits of investing in mutual funds online:

• Easy investment
• 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.

Apart from these two ways, you can buy mutual funds online through third-party apps.

Also, watch this video to see if you need an advisor or if you can invest in a mutual fund directly

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 of providing you with all the above services.

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

There are additional expense ratio associated with regular mutual fund investments, but think of them as your ticket to a smoother ride. These fees cover the valuable services provided by intermediaries, from personalized advice to ongoing portfolio management.

And when it comes to returns, the potential upside can outweigh the costs. With strategic planning and expert guidance, you stand a better chance of hitting your financial goals and securing a brighter future.

5) SIPs through Agent or Direct?

The same points we discussed above for general mutual fund investments are applicable to 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, a Mutual Fund Agent is not supposed to charge any fees because he gets a decent commission/brokerage from a mutual fund company.

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 your requirement.
• Review your mutual fund investments periodically.
• Gives you the experience and 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 them to you, but a mutual fund 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 promises 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 use the free third party apps which provide direct fund investment facility. They render poor customer service. They also try to cross sell insurance or loan products to you. No hand holding during market crashes..

What if you want to invest in mutual funds directly?

You can easily buy mutual funds directly online if your KYC is complete. 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:
i.) 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.

ii.) 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.

8.) Which is better direct mutual fund or regular Mutual Fund? – Final Note

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

Before putting an end to the confusion on deciding about direct mutual fund vs. regular mutual fund plans, I’ll tell you a small story that is indirectly related to this confusion. Have 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 trouble.

I hope you got the point!

You are going to have a long-term relationship with the mutual fund 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.

When it comes to your health, will you do DIY treatment or go to an expert?

When it comes to your wealth, why do you want to experiment with DIY investing.

From DIY (Do-it-yourself)  investing in direct mutual funds, upgrade your portfolio to  DIT (Do-it-together) investing in regular mutual funds today.

So, there you have it! Choosing the regular method for your mutual fund investments could be a game-changer for you. By teaming up with intermediaries who have your back, you’ll gain the confidence and support you need to navigate the financial markets like a pro. So why wait? Take the plunge and embark on your investment journey with a trusted partner by your side.

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