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The Dirty Little Mutual Fund Secret That Leaves You Poorer

Monday, January 08, 2018
By Kunal Bajaj

Kunal Bajaj, Founder & CEO, Clearfunds.com

Did you know every time you buy a mutual fund in India, you pay hidden brokerage that makes your broker rich? Not just rich — seriously rich!

Every mutual fund in India comes in two flavours — a regular plan and a direct plan. When you buy a regular plan, you buy it through a bank, broker, agent or distributor — and the mutual fund company pays him back a hidden commission every quarter. How does the broker make commissions when you have not even written a cheque for it? The bitter truth: This commission comes out of your investments.

Instead, when you buy a direct plan directly from the mutual fund company, you don’t pay any commission to anyone. The commission that you end up saving is added to your investment balance at the mutual fund. That’s why the net asset value (NAV) of a direct plan is always higher than that of a corresponding regular plan.

So how do you know which mutual fund you have bought — direct or regular?

  • If you have invested through your bank, you have invested in a regular plan and are paying hidden brokerage.
  • If your agent is not charging you anything or tells you his advice is for ‘free,’ you have invested in a regular plan and are paying hidden brokerage.
  • If your agent says he gets paid by the mutual fund company, you have invested in a regular plan and are paying hidden brokerage.
  • If your bank/broker /agent/distributor/advisor has not told you explicitly about which plan you are investing in, you have invested in a regular plan and are paying hidden brokerage.

Your agent will probably tell you that it does not matter which plan you invest in. After all, he only earns a small annual commission of 1% for his services.

It doesn’t sound like a lot, but in real terms, it is. For instance, if a 35-year-old investor were to put Rs 10 lakh in a 1% annual commission bearing regular plan of a mutual fund, which grows at 8 per cent a year, his investment would be worth Rs 76 lakh when he retires at 65. On the other hand, if he switched to a direct plan of the same mutual fund and cut out the 1% annual commission, his investment would grow to Rs 1 crore over the same period. What would he end up losing as 1% commission each year to his broker? A whopping Rs 24 lakhs!

In other words, when you buy a regular plan, a quarter of your retirement savings wind up in your broker’s pocket. This is money you have spent a lifetime saving up for your kids, only now your broker gets to keep your money for his kids.

This is why most good advisers these days will not sell or recommend regular mutual funds, which cost you a recurring, hidden brokerage fee, year after year, for your entire investing life.

The next time you want to invest, please pick an adviser who sells only direct plans of mutual funds and delivers unbiased advice that is in your interest, not his.

One more thing. Until recently, buying a direct plan was far from simple. You had to register at the mutual fund companies websites, remember tens of passwords and do your KYC every time you invest in with a new mutual fund company.

But now, online investment advisers offer the convenience of one-time registration, recommend the best possible funds and allow you to buy any direct mutual fund in India.

So switch to a direct plan and stop working to send your broker’s, banker’s or agent’s kids to study abroad. Make your hard-earned money work for your family, not his.

The author is a SEBI-registered online investment adviser

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