“Make mistakes, learn and self-improve. No dependency.“
When someone is looking out for a house to buy or rent a house, they have 2 options. One is by doing it themselves, which would require hunting a lot of places, dealing with many agents, landlords and investing a lot of time and effort to finally find that one property that fits their budget and other requirement. The other option is to take the services of a broker who acts as a mediator between property owners and house buyers. A broker or agent understands your needs and shows you selected properties that are likely to meet your requirements. This makes your job of house hunting easy and in return, you pay some fees to the broker/agent for his services.
Similarly, in mutual funds, there are distributors or Financial advisors who helps investors to find suitable Investment options for them and takes charges for this service which we named the expense ratio.
All Mutual Fund schemes, including equity and debt, provide two plans – Direct and Regular. In a Direct Plan, investors buy mutual fund directly from the AMC. role of Financial Advisor/distributors is completely eliminated and hence the expense ratio is low of funds . Whereas Regular Plan are those mutual fund plans in which investor buy through an intermediary such as a distributor/Financial Advisor or a banker who received sales commission or fee by the fund houses, thus reflecting a higher expense ratio compared to a Direct Plan.
Are you still doing your mutual funds through a Regular Plan ? Do you know how much extra you will pay over the next 15-20 years by paying that extra 2% to your Financial advisor or Agent ?
Taking investment decisions on your own makes most people uncomfortable. Why?
- They think, others know better
- Lack of experience
But this is a critical “factual error”. Why? Because nobody can manage your finances better than you.
The point is, taking investment decisions by yourself is key. It is your money.
Who cares the most for your money? It is only “You” and nobody else can do it.
If you ask advice from others, they will suggest you according to their understanding and knowledge or they can give you self benefiting Investment advice.
In the current scenario, this is common practice going around in the market.
A whole business model has been set up around “investment advisory services”.
When viewed from a Money perspective, let us see what investors would save if they were to do it all by themselves or by following the tips that keep floating around.
Let us see with example, how this affect our rate of compounding in long run –
Case-1: Do It Yourself
A person made the following investment:
- Amount: Rs.10,00,000
- Return Earned: 12% p.a.
- Holding Time: 25 years.
Let’s calculate the future value for DIY –
| Amount | Return (%) p.a | Time (Yrs) | Future Value |
| 10,00,000 | 12 | 25 | 1,70,00,000 |
Case-2: Through Advisor
A person made the following investment:
- Amount: Rs.10,00,000
- Cost: 2% on above.
- Net Invested Amount: Rs.9,80,000
- Return Earned: 12% p.a.
- Holding Time: 25 years.
Let’s calculate the future value of Investment through Advisor –
| Amount | Return (%) p.a | Time | Future Value |
| 9,80,000 | 12 | 25 | 1,66,60,000 |
Here we can see that there is a difference of 3,40,000 between Case 1 & 2.
Just by investing 20,000 less, the person’s wealth goes down by almost 3,40,000 in 25 years.
We make several such investments in our lifetime. Such 2% costs reduce our overall net worth accordingly.
Another most Important key point we should take in consideration is that novice retail investors rarely ever make long-term wealth in stock markets due to their panic and compulsive attitude towards the adverse situations which a knowledgeable investor grasps as a golden opportunity to build their portfolio.
Just keep in mind that D-I-Y investment is a matter of slow and steady, just like the tale of “The Tortoise and the Hare” !
Investors need to realize that in the long run the market is going to be lined up based on Fundamental, short term deviation will not affect the market fundamentals.
Here, Investment strategy is the king and all investment decisions should have that as the inviolable base. Financial investment completion should be built on rational analysis of data and emotions that need to remain in control while investing. Simultaneously, regular checking and rebalancing a portfolio periodically is a must, sometimes doing nothing with your investment could be a great strategy too!
“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin
Final take away –
DIY investment needs a lot of research, patience, time and most importantly belief in yourself.
If you decide to be a DIY investor in Mutual Funds, be conscious and careful and check the platform before you use it for investment as there are many online platforms giving Regular plans of Mutual Funds. So, while you’re being charged the same commission as with a financial advisor, the advantage of customized advice is missing.
