P014- Biggest mistake an MF investor can make

[rski]

Today I am going to write about what I feel is the single biggest mistake a mutual fund investor can make . Again this is a feeling , I am in no way qualified to advise .

The biggest mistake is investing in a mutual fund NFO via a distributor , not a direct plan .

Now let me set out my argument . Let’s take for example the recently concluded NFO for ICICI Flexicap which set records for collection .

From what I understand , the formula for expenses for direct investors is simple

Expenses in regular plan - commission paid to distributor.

In my understanding investors who invested direct are going to end up with an expense of 0.20 % and those who invested via a distributor will have an expense of 1.60 % .

Yes the difference is going to 1.40 % per year for whatever time they are invested in .

So essentially a regular investor gives up 1.40% returns per year x number of years invested for a fund with no track record subscribed to at peak valuations .

If I had fallen into this trap I would be redeeming the next day and going direct .

Given the sheer number of NFO’s being planned I can only see that the business of shafting the poor retail investor has taken a bold new dimension .

I mean why pay 7 times more expenses for a fund with no track record at peak valuations .

In my limited and flawed understanding no fancy interface or bank or distributor is worth paying 7 x more that too for a product with no track record of returns .

 

[zashmaster]

@rski I am not sure of the official ER has been published. I would be surprised if the ER of the direct plan is around 0.2 - even inde funds find this number unviable. The typical difference in TER between direct and regular plans of mutual funds is about 1%.

Direct plans were introduced more than 8 years ago. Still the majority of retail AUM in equity funds is in regular plan. The typical distributor would find debt funds less rewarding - due to lower commissions; due to this and the presence of larger investors, the debt plans have a better proportion in direct.

In earlier days, when trasnactions wre cumbersome, distributors provided a service and made investing in mutual funds easier. Now the process is much simpler; still many new investors still go with regular plans. And many of them don't even get much service.

It is easy enough to select a decent basket of mutual funds. The wikis in the sub and the discord give enough pointers. So a new invetor can just start with direct plans.

Disclaimer: I am a RIA and don't (and can't) earn commissions.

 

[gunderson500]

@zashmaster The TERs are being disclosed. Latest- Regular plan: 1.77% Direct Plan: 0.18%.

That said, while the point at the core of OP's argument is well-taken, there is no saying how egregious the actions of AMCs can be even in running funds. Case in point: IMHO Sundaram charging 1.51% in their Ultra short Regular Plan is beyond reprehensible.

 

[rski]

@gunderson500 It’s even worse than what I assumed

 

[rski]

@gunderson500 The only interest being serviced here is that of the AMC and distributor. As usual the Indian Mf industry is ready to shaft the consumer .

That’s why I consider it utter foolishness to go into a MF NFO . Rather go direct after expenses are published .

Or pay 10x the expenses and try to feel happy about it

 

[rski]

@zashmaster .18 for direct and 1.77 for distributor . One thing is clear , ICICI continues it proud tradition of shafting the consumer . Be it pricing like this or the close ended funds they used to do earlier

A near 10x difference in cost for the same product only implies one thing . It’s not the customer whose interests are front and Center .

Again this is by no means advise , just an opinion .

 

[rski]

@zashmaster Wait for it to be published , it’s going to be close to that figure .

 

[chrislaforest]

@rski what about already running funds?

 

[patriotraider]

@chrislaforest Work out a transfer plan (considering tax implications, exit loads etc) to direct funds.

EDIT:

Direct plans came in 2013 and I worked out the transfer, averting exit loads and tax implications to the extent possible. Within a year I was completely on Direct. Had I kept waiting it would have made the job more and more difficult, besides compounding expense.

For anyone still contemplating Regular->Direct move: Its best time was 2013 or any fresh investment after that. Second best time is today.

 

[rski]

@chrislaforest The difference is never this high

 

[chrislaforest]

@rski isnt it difficult to manage direct plans, no common portal to track everything in 1 place, especially if u have 10-15 different funds?

 

[briansew]

@chrislaforest Why do you have so many funds in the first place ?

 

[patriotraider]

@chrislaforest Not really. There are many options out there for direct funds. MFU, CAMS, Kuvera, VR portfolio to name a few. There are tools to produce various views of your investments from primary source such as registrar's statements.

 

[rosegarden]

@chrislaforest Not anymore. Tracking through Kuvera, Indmoney etc is straightforward.

 

[phanthanh96]

@rosegarden Et money?

 

[rski]

@chrislaforest Cams app . I manage everything through it

 

[patriotraider]

@rski Also factor in compounding effect of the difference.

 

[kazurk]

@rski 0.2%TER is too low for a flexi cap fund, I guess it's to lure investors to buy NFO initially.
I am sure they will increase it gradually to about 0.5-0.7% TER.

 

[rski]

@kazurk It’s exactly the opposite of you think of it . The expense formula of SEBI is simple for direct plan

Expense in direct plan - less commission paid to distributor

Guess what happens when 1.40 is paid to the distributor and the TER is say 1.70. They can charge only .30 to the direct .

 

[kazurk]

@rski I am saying 0.2% is less for a flexi cap Direct plan (you can compare other flexi cap (Direct) funds from different Fund House, they may not change the regular plan TER but they will increase the Direct plan TER ( say upto 0.6%) is what I think.