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A Direct Plan Checklist

With no intermediary to assist you, you'll eventually have to befriend call centre executives at many asset management companies, to help you with your statements, your paperwork, your ongoing transactions and your service issues

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Direct Plans of Mutual Funds are on the rise. A recent report by AMFI suggests that as much as 34% of all fresh individual level inflows are estimated to be coming into direct plans. While some of these direct investments are being made with the advice and support of fee-based investment advisers, the larger piece of the pie consists of unadvised investments, many of them from first time investors. This can, unfortunately, prove to be quite dangerous in the long run, as many of these unadvised investors are not privy to the risks they are taking, or using flawed selection criteria for selecting their investments - or both. In reality, direct plans are suitable only at the extreme ends of the investor spectrum. Small investors who are passively running SIP's of say Rs. 1000 per month, and are yet to have accumulated a corpus of any significance - and large, market savvy investors who are capable of taking well founded investment decisions, stand to benefit from unadvised, direct plan investing. The others will invariably suffer when markets turn volatile over extended periods, which they invariably will.

If you do not fall into any of the above two categories, here's a simple checklist for you to decide whether or not the direct, unadvised route is meant for you. The more points you check off, the more confidently you can invest directly. If you are unable to check off at least fiur of these six points, avoid the direct route.

You understand how both debt and equity markets work
You have a fair understanding of the short term, medium term and long-term drivers of both fixed income markets and stock markets. For instance, you understand credit cycles, correlations between interest rates and bond fund performances, and valuation indicators such as Price to Earnings Rayio, Price to Book Value Ratios, and Market Cap to GDP Ratios, and their significance with respect to investment decision making.

You are fully privy to investment risks
You are well aware of the risks that are intrinsic to all types of mutual funds. For instance, you do not harbour utopian views such as 'debt funds can never lose me money' or 'balanced fund NAV's will never go into negative territory'.

You are capable of fund selection based on valid parameters
And by valid parameters, I mean looking beyond short term past returns, and evaluating a fund based on its philosophy, fund manager pedigree, sectoral focus, stock selection methodologies, and the like. You do not just go ahead and pick the 'flavour of the month'.

You are in full control of your emotions
You are capable of pressing the override switch with respect to emotions such as greed and fear; thereby avoiding all too common biases such as the loss aversion bias, the conformation bias and the sunk cost bias, to name just a few. You are also capable of ignoring the market noises around you and using common sense to guide your investment decisions.

You have the time and energy to deal with multiple fund houses
With no intermediary to assist you, you'll eventually have to befriend call centre executives at many asset management companies, to help you with your statements, your paperwork, your ongoing transactions and your service issues. Make sure you've got enough time on your hands for doing this.

You are, in general, a disciplined person
You have the ability to take hard calls that go against the grain. For instance, you are capable of rebalancing your portfolio back to your target asset allocation after a bullish phase, despite the noises (and the voice in your head!) screaming 'invest more money into equities'. You have the wherewithal to draft your own financial plan and stick to it resolutely.


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