Part 18 - Should You Buy Mutual Funds Directly or Through a Broker?
Part 18 - Should You Buy Mutual Funds Directly or Through a Broker?
Mutual Fund Investing: Direct Plan vs Broker – Full Comparison
In India (and globally), there are two main ways to invest in mutual funds
Two Ways to Buy Mutual Funds
Through a Broker (Distributor/Intermediary):
Definition: Investors purchase mutual fund units via intermediaries like banks, financial advisors, online platforms (e.g., Zerodha Coin, Groww in India; Charles Schwab, Fidelity globally), or independent distributors.
These are typically regular plans, where the broker earns a commission.
Process:
India:
Open an account with the broker/platform, complete KYC, and invest via their interface. The broker facilitates transactions with the AMC.
Global:
Similar process through brokerage accounts or robo-advisors (e.g., Betterment in the U.S.).
Transactions for open-ended funds are executed at the day’s NAV (post-cut-off time, typically 1:30 PM or 3:00 PM IST in India, or market close globally).
Through the Mutual Fund Company (Directly via AMC):
Definition:
Investors buy units directly from the AMC’s website, app, or office without intermediaries.
These are direct plans, introduced in India by SEBI in 2013, with no distributor commissions.
Process:
India: Register on the AMC’s portal (e.g., HDFC AMC, SBI Mutual Fund), complete KYC, and invest directly.
Platforms like MF Utility or CAMS/KFintech also allow direct investments across AMCs.
Global:
Direct purchases are less common but possible via fund companies like Vanguard or Fidelity (without a brokerage account).
Transactions follow the same NAV-based pricing (daily NAV at market close).
Benefits of Each Method -
Through a Broker (Regular Plans)
Convenience and Guidance:
India:
Brokers provide personalized advice, portfolio recommendations, and goal-based planning, ideal for beginners or investors with limited market knowledge.
Global:
Financial advisors or robo-advisors offer tailored strategies (e.g., asset allocation based on risk tolerance).
Example:
A Groww advisor in India may suggest a mix of equity and debt funds for a 5-year goal.
Access to Multiple AMCs:
India: Platforms like Zerodha Coin or Paytm Money allow investments across 40+ AMCs in one account, simplifying portfolio management.
Global:
Brokerages like E*TRADE provide access to thousands of funds from various providers.
Additional Services:
India:
Brokers offer tools like SIP calculators, portfolio tracking, and tax statements. Some provide customer support for KYC or redemption issues.
Global:
Platforms include research reports, market insights, and integration with other investments (e.g., stocks, ETFs).
Ease of Use:
India/Global: User-friendly apps and interfaces streamline investments, especially for tech-savvy investors.
One-time KYC with the broker suffices for all AMCs.
Through the Mutual Fund Company (Direct Plans)
Lower Costs:
India:
Direct plans have lower expense ratios (TER) as no distributor commissions are paid. TER difference is typically 0.5-1% (e.g., 0.8% for direct vs. 1.8% for regular equity fund).
Global:
Direct purchases from fund companies like Vanguard avoid brokerage fees or advisory charges, though less common.
Impact: A 1% TER saving on ₹1 lakh invested at 10% CAGR over 20 years adds ~₹1.5 lakh to returns.
Higher Returns:
India:
Lower TER translates to higher net returns. For example, a direct equity fund with 12% gross return and 0.8% TER yields 11.2% net, vs. 10.2% for a regular plan with 1.8% TER.
Global:
Similar benefit, though cost differences are smaller in low-fee markets like the U.S.
No Conflict of Interest:
India/Global:
Direct plans eliminate the risk of brokers pushing funds with higher commissions over better-performing ones.
Example:
A broker in India might recommend a regular plan with high TER due to commission, even if a direct plan is more suitable.
Control and Transparency:
India/Global: Investors interact directly with the AMC, ensuring clear communication about fund details, NAV, and performance.
Disadvantages of Each Method -
Through a Broker (Regular Plans)
Higher Costs:
India: Regular plans have higher TER due to distributor commissions (0.5-1% more than direct plans).
For equity funds, TER ranges from 1.5-2.5% vs. 0.5-1.5% for direct.
Global:
Brokerage fees or advisory charges (e.g., 0.25-1% annually in the U.S.) increase costs compared to direct purchases.
Impact:
Higher fees erode long-term returns, especially for debt or index funds with lower returns.
Potential Bias:
India:
Brokers may prioritize funds with higher commissions, not necessarily the best performers.
SEBI’s 2018 fee disclosure rules mitigate this, but bias persists.
Global:
Advisors may favor funds from partnered providers, reducing objectivity.
Dependency:
India/Global:
Investors rely on brokers for advice, which may limit financial literacy or confidence in independent decision-making.
Example:
A novice investor in India may stick with a broker’s suboptimal fund choice due to lack of knowledge.
Platform Risks:
India:
Online brokers face technical glitches or cybersecurity risks. Some charge additional fees (e.g., ₹100 transaction charge for investments ≥ ₹10,000).
Global:
Brokerage platforms may impose hidden fees (e.g., account maintenance charges).
Through the Mutual Fund Company (Direct Plans)
Lack of Guidance:
India:
No advisory support, requiring investors to research funds themselves. Unsuitable for beginners or those unfamiliar with risk profiling.
Global:
Direct investors must navigate complex fund documents without professional help, increasing the risk of poor choices.
Example:
An Indian investor may choose a sectoral fund unaware of its high risk, leading to losses.
Time and Effort:
India/Global: Investors need to compare AMCs, analyze performance, and manage portfolios independently, which can be time-consuming.
Example:
Tracking 10 direct plans across AMCs in India requires more effort than using a single broker platform.
Limited Access to AMCs:
India: Investing in multiple AMCs requires separate accounts or using platforms like MF Utility, which may lack the seamless interface of brokers.
Global: Direct purchases are less common, and not all fund companies offer user-friendly direct investment options.
Administrative Hassles:
India: KYC updates or redemptions may involve direct coordination with AMCs or RTA (e.g., CAMS), which can be slower than broker-supported processes.
Global: Similar issues, with less streamlined customer support compared to brokerages.
Costs Comparison -
Expense Ratio (TER):
Broker (Regular Plans):
India: 1.5-2.5% for equity, 0.5-1.5% for debt, 0.3-0.5% for index funds. Includes 0.5-1% distributor commission.
Global: 0.5-1.5% for active funds, 0.03-0.5% for index funds, plus advisory fees (0.25-1% annually).
Direct (AMC):
India: 0.5-1.5% for equity, 0.3-1% for debt, 0.1-0.3% for index funds. No commission.
Global: Same as fund’s base TER (e.g., 0.04% for Vanguard index funds), no advisory fees.
Example: HDFC Flexi Cap Fund (India) has TER of 1.8% (regular) vs. 0.9% (direct).
Transaction Charges:
Broker:
India: ₹100-150 for investments ≥ ₹10,000 (first-time investors); ₹100 for SIPs ≥ ₹10,000. Some platforms charge platform fees.
Global: Brokerage fees (e.g., $5-10 per trade in the U.S.) or account fees.
Direct:
India: Same transaction charges (₹100-150) if processed via RTA. No platform fees.
Global: Typically no transaction fees for direct purchases.
Impact: Minimal difference, but brokers may add platform-specific costs.
Exit Load:
Broker/Direct: Identical, as it’s fund-specific (e.g., 0-1% for equity funds if redeemed within 1 year in India).
Impact: No difference between methods.
Other Costs:
Broker:
India: STT (0.001% on equity redemptions), GST (18% on TER).
Global: 12b-1 fees (0.25-1% in U.S.), capital gains tax.
Direct:
India: Same STT and GST, but lower TER reduces GST impact.
Global: Same as broker, minus advisory fees.
Impact: Direct plans save on TER-related GST.
Key Observations -
NAV Pricing Clarification:
open-ended funds (whether bought via broker or direct) are priced at the daily NAV at market close (e.g., 3:00 PM IST in India, 4:00 PM EST in the U.S.).
Orders placed anytime are executed at the same or next day’s NAV based on cut-off times, not intra-day prices. This applies to both methods and is a limitation compared to ETFs.
Indian Context: Direct plans are cost-effective (e.g., 0.5-1% lower TER), but only ~20% of mutual fund AUM (₹61.33 trillion in June 2024) is in direct plans due to low financial literacy and reliance on brokers. Platforms like Groww and Zerodha dominate regular plan sales.
Global Context:
Broker-mediated purchases are common (e.g., via Fidelity), but low-cost providers like Vanguard encourage direct investments for index funds.
Advisory fees in the U.S. (0.25-1%) make direct plans more attractive for savvy investors.
Choosing Between Methods:
Broker: Best for beginners, those needing advice, or investors prioritizing convenience and multi-AMC access.
Direct: Ideal for experienced investors comfortable with self-research, aiming to maximize returns via lower costs.
Cost Impact: In India, a regular plan with 1% higher TER vs. a direct plan reduces returns by ~₹15 lakh on a ₹10 lakh investment at 12% CAGR over 30 years. Globally, similar savings apply for direct index funds.
Recommendations -
If You’re a Beginner:
Start with a broker (e.g., Groww, Zerodha Coin) for guidance and ease, but compare regular plan TERs and ask about commissions.
Transition to direct plans as you gain knowledge.
If You’re Experienced:
Use direct plans via AMC portals or MF Utility to save on TER.
Research funds using tools like Value Research or Morningstar.
Hybrid Approach:
Use broker platforms for convenience but select direct plans where available (e.g., Zerodha Coin offers direct plans in India).
NAV Awareness:
Since both methods use NAV-based pricing at market close, time your orders before cut-off (e.g., 1:30 PM IST) to get the same day’s NAV, especially in volatile markets.
