In the last few years investment in mutual funds through the direct route is increasing. People believe they are cheaper than regular mutual funds as no commission is involved. This is indeed true
Direct funds can earn you an extra 0.1-0.5% through commission savings, which could make a significant difference over a longer multi-year period.
But this is true in theory only but not in the real world for most people. Why it’s like that let’s find it out.
How do people select mutual funds?
When it comes to mutual fund research very few investors do research for fund selection. Most buy funds after seeing some videos of influencers on Instagram or YouTube.
Some people just Google Best mutual funds or Top mutual fund or High return mutual.
Some people just buy on a friend’s recommendation.
Is this research? Watching some videos, googling something is not research, SEARCH IS NOT RESEARCH.
What happens when people invest like that? They end up buying hot funds from some hot sectors. If some fund did well in the past mostly like that sector is overvalued. A few months back everyone was going crazy for smallcap and midcap funds. Here is the money control article
When Google and social media are the only inspirations for selecting funds, people end up buying funds from the overvalued sector because they see at the present moment they are the highest return giving funds. People simply ignore the overvaluation, and the risk associated with such funds and they don’t check at all whether such fund is meeting their risk profile or not.
The Data proves, that the so-called best funds, top funds don’t remain best after a few months and a year, and most top funds deliver average or below average returns in the coming years. The top-performing fund is actually a myth.
What do people do when they see their fund not performing? They again search for the best fund on the internet and again end up buying similar hot funds. Many just keep on buying every best fund and their mutual fund portfolio becomes too big. I have seen many with 20+ funds. This ends up with overlapping.
When the market crash
When the market crash they have no idea what to do with their extra underperforming fund. Most in such situation end up selling. With this kind of Google research people buy expensive funds at the top and sell at the bottom. Thats means no saving in commision but making loses and compromising the returns.
Here is a news article showing most of the SIP clousre are from direct fund investors.
Mutual funds are personalized products not generalized
Just as the same medicine can’t be prescribed to everyone with the same illness due to differences in body profiles, the same mutual fund isn’t suitable for every investor. Investment choices should align with an individual’s financial profile. Online recommendations are often generalized and may not be the right fit for everyone.
The difference in return is huge. DIY investing takes a big toll. It’s not saving its losing
and this is not a joke. The return spread are big
Its the hard-earned money expert advice should be taken before investment.
Direct funds are good only if you have the analysis expertise.