Kudos to SEBI, for No Frills NAV for Direct Investors in Mutual Funds

Kripananda Chidambaram, 28 Sep 2012

From Jan 1 2013, fund houses will have a separate NAV plans for direct investors. What a brilliant move for  nvestors! And not surprisingly the distributors are complaining.

One side is benefiting and the other side is not. Why is it so?

Let us first understand how the investors are benefiting: When you invest in mutual funds the company that manages funds charge asset management fee. Out of those fees a very small portion goes to the distributor. Even in cases where the investment was made without the help of distributors the charges remained the same. SEBI now has guided the asset management companies to publish a separate NAV that will have lower asset management fees for direct investors. This is good news because the investors will get benefit of lower cost, which in turn will translate to higher returns.

Now, let us understand why distributors are unhappy:  Distributors' argument is when investor will have the option to earn slightly better returns, why investor will choose the distributor mode of investment? Another argument is that retail investors do not have adequate knowledge in selecting the right fund and they may invest in wrong funds.

Both the arguments are naïve. Investors will ultimately understand that if you want value you need to pay for it and if distributors are confident of their 'value creation' ability they should not worry. 

Our take: Mutual funds are supposed to be simple products. All these years the mutual fund industry did not have that 'orientation'. They kept launching hundreds of schemes, which added to the investor confusion. Investors find it as complex as directly investing in stocks or bonds if not more. This complexity has benefited distributors all these years. In fact they somehow managed to keep investors ignorant. This is one of the main causes of mutual fund industry not growing the way they should have.

The direct plan idea will motivate mutual fund houses to keep things simple. Each mutual fund will have just a couple of schemes under each category. Investors will then make friends with mutual funds.

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