As a prudent investor who wants to create a portfolio that will help you achieve your investment objective in a time-bound manner, Suren Kochhar explains what you should know.
How often do we get tempted to invest in a product performing well in the short term or in some MF that we have heard about from a friend? Not assessing if such investments really fit well with our investment objectives or, without understanding the actual reasons leading to outperformance, we end up investing in such MF plans for emotional reasons.
But as a prudent investor who wants to create a portfolio that will help you achieve your investment objective in a time-bound manner, it's important to note that:
- It's not about how much you invest; it's about where you invest.
- It's not about timing the market; it's about time spent in the market.
- It's not about investing in an NFO; it's about understanding if the NFO you are investing in is well-suited to your overall investment objective.
- It's not about defining your financial goals; it's about working towards your financial goals with the right asset allocation.
In this process of knowing what to do, but not actually knowing how to do it, we end up making several mistakes in our investment portfolios.
We hear a lot about expense ratios, lower the better for superior fund performance, etc, but is that how it actually works in real life?
In practical terms, an underperforming fund, irrespective of its lower expense ratio by a few basis points, will continue to underperform its peers and the benchmark. A regular plan scheme, performing well over a consistent period, does outperform a direct plan. It's the person who's guiding who is important here.
Often a rearview approach is adopted while investing for a long-term horizon.
In the table below, we have analysed the actual impact of the difference buying a direct plan or a regular plan makes to your mutual fund portfolio.
The data shows the return differential between a direct plan and regular plan for a given scheme category.
- Period considered: 5 years, 3 years and 1 year.
- Returns are considered for five different schemes categories as an example and sample.
- Returns are considered for a particular scheme category average. Best, medium and worst performing schemes are all included in a scheme category.
- Returns are considered from February 2, 2024, and backwards for each return period bucket.
- All large size, medium size and small size AUM schemes have been considered in the above example.
Note that the TER (total expense ratio) difference usually widens more between a direct and a regular plan for a small size AUM scheme. We have considered all the possibilities in the above example.
What should we understand from this?
The difference in returns per annum in a direct plan versus a regular plan ranges between a maximum of 2.16 per cent and a minimum of 1.15 per cent, considering all above scheme categories across all above periods and scheme AUM sizes.
Do you really believe this makes a huge dent in your overall return considering the services that a mutual fund distributor provides? These include:
- Entire hand holding from a mutual fund distributor during your investment journey.
- Services at your doorstep.
- Periodic reviews about a scheme's performance, asset allocation and long-term investment objective re-alignment.
- Managing investment behaviour.
- Complete query handling.
- The human touch.
- Managing hasty investment behaviour and decisions.
- Family orientation with long term relationship.
- Financial education/updates just a call away.
- Helping avoid kneejerk investment decisions, usually driven by information not deemed good for your long-term investment objectives.
- Update on other financial products and opportunities.
- Above all, you get to focus on your own work and your competencies rather than worrying what to do with your MF investment portfolio.
So, for the above reasons at the very least, do you really still believe that this return differential is worth it?
A great plan created with superior execution and followed through with several periodic reviews can help you achieve your investment goals. This journey cannot be accomplished without managing the 'investment behaviour' of investors who buy MFs based on emotional reasons.
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