If a stock is seen as a good investment opportunity, it is good for you whether you are an individual or an institutional investor. If it goes up, as forecast, all investors benefit.
But there are some differences in investment strategies depending on which of these categories you fall into.
Firstly, institutions have scale and access to resources. Their scale can justify an investment in research designed to yield superior returns. It is like an investment in a business activity. By doing so, the investing institution acts like an investment firm that invests others’ money.
Most individuals have limited scale. That scale will only yield limited upsides and downsides, regardless of the amount of time and effort invested in research. For an investment pool of, say Rs. 10 lacs, how many stocks or MFs can you really analyse? If the standard return from an index fund is 10%, you will earn Rs. 1 lac. A 2% improvement over the market will yield Rs. 20,000 more over a year. You have to ask yourself the question, “Is it worth my while trying to unravel investing mysteries on my own, across thousands of stocks, MFs, Bonds, etc. for that gain? What is my cost of doing that research?”
Individuals should member that there are many institutions, with access to deep talent pools and resources, with a lot money at stake, trying to do the same thing – generating market-beating returns. Is it really worth your while trying to outperform the market on your own steam? An institution with a Rs. 100 crore investment pool can hope to generate an extra Rs. 2 crores from the same research, hence might still find it somewhat worthwhile.
The other difference is that individuals have access to a plethora of opportunities that institutions do not. For example, the Indian government offers several savings schemes only for individuals. Strategies for individual investors should almost always look to leverage those opportunities for investors that are better than those available to institutions and only available to them.
The difference between the two types of investments arises on account of the total expense ratio (TER) which is loaded on to the fund. It is much higher in case of a regular fund, thereby reducing the returns available to the investor. Through the principle of compounding, over time, the difference expands. The TER difference between the two will vary based on the type of fund. Expenses for equity funds are higher, as is the difference.
It must be kept in mind that the intermediaries provide services to investors such as advice and statements, KYC completion from time to time which may be of use to some investors and they may not mind bearing the extra cost.
Recommendation:
If you are invested in regular MFs, make the move to direct MFs today. Your returns will improve as a result.
Note: A move from regular to a direct MF will amount to a sale and purchase transaction and attract applicable capital gains tax and other provisions. Hence, please evaluate the implications prior to initiating the move.
In addition, some services like advice that you were receiving from the distributor will not be available. You will also need to complete the investment related formalities yourself. The focus of MFs is on generating returns, not so much on customer service. However, they will send you account statements if you are a direct investor.
How will you know whether your MF is direct or regular?
Direct funds say so in the name. In your statement, the word ‘Direct’ should be a part of the name of the MF scheme. if they don’t say anything, they are regular which sounds good but really means High Fee Class.
Another way to check is the ‘Advisor’ field on the statement. Direct MFs will display ARN followed by a number.
How do I invest directly?
You need to invest through the website of the MF or through branch offices if they have them. Going through a bank or another distributor will get you a regular MF.
Website of the some of the largest public sector Mutual Funds:
https://www.sbimf.com/
https://www.utimf.com/
https://www.licmf.com/
What is the difference in earning between a regular and a direct MF?
The difference is exactly equal to the extra fees charged. The difference is smallest for index funds and liquid funds and highest for hybrid funds and equity funds.
