Should I invest directly in a mutual fund or through an agent?

Wondering is it better to buy mutual funds directly? This is the same question plaguing innumerable investors who are venturing into the market for the very first time or even seasoned campaigners who have invested before. Experts feel that in most scenarios, it is always better to deploy investments in mutual funds directly rather than go through any agent/broker. Each time that you make an investment in any equity mutual fund, you have to pay an entry fee/load of anywhere between 2-2.5% of the amount invested.

This fee is passed on by mutual fund firms/houses to distributors as commissions. Distributors in these cases include brokers, agents or banks through which investor applications are routed. The logic behind the imposition of the entry load is quite easy to understand, i.e. distributors have to spend for investor awareness and education along with getting investments. Hence, they have to be paid for their services. Till sometime back, even if you did not invest via any broker and directly deployed your money, the entry load was still charged. SEBI (Securities and Exchange Board of India) has now made it a regulation where mutual funds will not charge any entry load for direct investments. This makes it easier if you were wondering how to buy mutual funds without a broker. Investments made online are also in this bracket if they are not done through any brokerage.

Why does it basically matter?

The 2-2.5% entry load may not initially appear as much although your returns will be significantly affected by the same in the long haul. Suppose you invest a sum of Rs. 1 lakh and in this case, differences may touch in excess of Rs. 10,000 or even higher over a period of 10 years. Investors did not previously worry much about entry loads since returns were sizable from equity funds. In bullish markets, loss of overall returns owing to entry loads could be seen rarely. However, market corrections or any fall in the market naturally leads to higher losses for investors.

With fabulous returns being a thing of the past for some time now, investors are now feeling the pinch of the 2-2.5% entry load by all means. Most mutual fund firms/houses have online provisions although investors have to go to the fund office or centre for deploying the very first investment and submission of documents. These include a copy of the PAN card for adhering to KYC (know your customer) regulations. Post getting a password, the investor can make online investments accordingly. The decision by SEBI has definitely lowered investor costs as per experts. Investors also have to pay the annual fee for fund management and this may hover between 1.5-2% and is called the expense ratio. Add the entry load on top of this and you will see how it matters in the long run with regard to impacting your returns.

There is absolutely no difference observed for the expense ratio which is charged whenever there is any direct investment or investments are done via any broker. The expense ratio will be on the lower side in case the investment has been directly done and there is no payment of any trailing commission. This will further enhance returns for people who have been investing directly. Hence the best place to buy mutual funds online should be found and direct investments made without any entry load.

Advantages of direct mutual fund versions 

Looking to invest directly in top picks like Nippon India mutual funds and others? Here are some of the biggest advantages of direct mutual funds. 

  • Better returns- Investing directly in options like the Nippon India gilt securities fund and other types will naturally get you higher returns as compared to the regular version of the same fund in question. 
  • Expense Ratio is considerably lower in case of direct mutual funds. The fee paid to any mutual fund advisor otherwise comes out of your budget and is deducted from the amount invested. This is subtracted as a specific percentage of the investment by the mutual fund firm and ranges between 0.5-1%. When you invest in a direct mutual fund, no distribution charges/commission fees are deducted by AMCs. Expense ratio is lower since mutual funds will not pay commissions to brokers as well. 
  • NAV is higher- Net asset value (NAV) is considerably higher than regular mutual funds if you are investing in direct mutual funds. Direct funds will have higher NAV than their regular peers. Your investment value will naturally be higher in this case. 
  • Safer investment avenue- There will be zero hidden costs and any other vested interests when you invest in direct mutual funds. You will not have to worry about any chances of fraud or ulterior intentions of advisors. It is sometimes good to take professional advice but this has often proven costly for several investors in regular mutual funds. Retirees and senior citizens who do not require active guidance on their investments should always look for reputed and credible online platforms to deploy investments in direct funds. 
  • Remain fully in control- With direct investments, you will always have control of your investments without depending on anybody else. 

As can be seen, investing directly in mutual funds is actually way better than investing through an agent if you can do without the guidance/advice. However, in any case, you should naturally work out how to invest in mutual funds before anything else. 

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