Did you know that every time you buy a mutual fund, you pay a 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 a commission when you haven’t 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 are ‘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 one you have bought?
If you have invested through your bank, you have invested in a Regular Plan and are paying a 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 that 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.
Your agent will probably tell you that it doesn’t 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% commission bearing Regular Plan of a mutual fund, which grows at 8% 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% commission, his investment would grow to Rs 1 crore over the same period.
What would he end up losing as a 1% commission to his broker? A whopping Rs 24 lakh!
In other words, when you buy a Regular Plan, a quarter of your retirement savings wind up in your brokers’ 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 lifetime.
The next time you want to invest, 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 Company’s website, remember many passwords and do your KYC every time you invest in a new fund.
But now, online investment advisors like Clearfunds 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 brokers, bankers or agents’ kids to study abroad. Make your hard-earned money work for your family, not his.
(The writer is Founder and CEO of Clearfunds.com, a SEBI-registered online investment advisor)