Taurus debacle shows how investors can be penny wise, pound foolish

NEW DELHI: The cheapest option is not always the best. Though investing in direct plans of mutual funds means lower charges, you could lose more than what you save if you opt for the wrong fund. More than 76% of the AUM of the four debt schemes of Taurus Mutual Fund was invested directly, and less than 24% was on the advice of distributors. The four debt funds of Taurus crashed by 7-12% in a day after Ballarpur Industries was downgraded last week. The gains of almost one year were wiped out in a day.

Since their launch in January 2013, direct plans have garnered almost 40% of the total industry AUM. But, as the Taurus Mutual Fund debacle shows, not all the investments in direct plans were smart decisions. "Most investors in these funds had invested directly. They were not mis-sold by distributors," says Manoj Nagpal, CEO of Outlook Asia Capital.

Interestingly, individual investors accounted for barely 7.7% of the AUM of the affected funds. A large chunk of the investment was from corporates and banks. Almost 70% of the investments by corporates and 85% of the investments by banks were through the direct channel.

Mutual fund distributors say the Taurus crash underlines the importance of investing on the advice of a qualified advisor. "It's a case of penny wise, pound foolish. They might have saved a small amount by going direct but lost far more when the funds crashed," tweeted Sterling Fincap, a Shillong-based distributor.

Others point out the paradox in letting investors take their own decisions. "If an adviser wishes to recommend a small investment of Rs 10,000 to an investor, the former needs to be properly qualified, experienced and knowledgeable: if the same investor wants to invest even Rs 10 lakh on his own, he needs to have absolutely no knowledge of the scheme or investments per se," says Delhi-based mutual fund distributor Tamanna Varma.