Modes of investment in mutual funds

The objective of this write up is understand direct entry scheme in mutual funds, before we proceed to understand  direct entry scheme, let us  have basic idea of mutual funds.

Meaning of Mutual Funds

Carpooling is order of day in major cities around world due to rising fuel costs and traffic.

One of the definitions of carpooling is where two or more people who work in same office or offices in same locality pick their friends or colleagues in their car to the office and drop them back to their residence.  

Mutual Funds= Car Pooling

Mutual funds is basically an instrument where many investors (Co Passengers) invest in various schemes (Car) which is managed by a fund manager (Car driver/Owner) to get returns on their investments.

Types of Mutual Funds

A person owing own vehicle can travel in his/her convenience but a person travelling by public transport should travel as per the timings of the service providers.

Based on Maturity Period

Open Ended Fund (Own Transport) gives an investor the liberty to invest and exit out of the fund as per his convenience, in other words as per their wish.

Closed Ended Fund (Public Transport) restricts an investor from investing in the funds as per his/her convenience, in other words cannot invest as per their wish. Investment should be made at the time when the scheme is open for subscription.

Based on Investment Objectives

Like cars can be classified on based on sizes and comfort level, mutual is classified based on the investment objectives of investments.  Eg. Equity, Debt, Money Market & etc

Understand Net Assets Value (NAV)

Mileage is basically used to measure the number of kilometers covered on given quantity of fuel. In the same way NAV is used to find out the amount required to invest in one unit of mutual fund. End of day both mileage and NAV is a measuring tool.

Formula to Calculate NAV

NAV= Total Assets of the Scheme- Total Liabilities of the Scheme/ Number of Units in the scheme

NAV is always expressed in form of currency.

Mode of Investment

Travel in public transport is always considered cheaper than travelling in autos, cabs and other mode of transport. In the same way investment in direct entry of mutual fund scheme is always beneficial to a mutual fund investor.

Direct Entry scheme means where an investor directly submits his/her mutual fund application to the mutual fund company without help of any intermediary (brokers/agents)

Investments made directly to the mutual fund company is known as Direct Plan and invested through brokers/agents is known as Regular Plans.

There is saying “that there is no free lunch”, in the same way no brokers/agents will give you a free service. The broker/agent will collect his/her pie in form of commission from the mutual fund company.

Mutual Fund Company usually do not pay the commission to the brokers/agents from their pockets. Mutual Fund Company only act as an intermediator between the investor and mutual fund agent/broker. In other words they collect the commission from the investor and pays to the broker/agent.   

EXAMPLE (NAV’s are sourced from Company’s website on 04/02/2015 at 8.14 am)

In Amount Rs

In current scenario the difference in NAV in a direct scheme and regular scheme is the brokers/agents commission.

The catch is a lay man investor will neither have experience/expertise to select the appropriate mutual fund as per his/her requirements.

The ground reality is the agents/brokers in mutual funds/insurance promote products which give them higher return (commission). Thus the lay man investor does not usually gain from so called expert advice from the broker/agent.

In conclusion an investor gains in monetary terms if he invests in mutual fund directly than through a broker or agent.