6 years ago, in January 2013, SEBI has come out with several reforms including introduction of direct schemes in mutual funds. While investors have started investing through direct schemes, investors still have many doubts and questions about direct plans of mutual fund schemes. What are the direct plans in mutual funds? Who should invest through these direct plans of mutual fund schemes?
Regular and direct plans are just two options to buy the same mutual fund scheme, run by the same fund manager who invests in the same stocks or bonds. The only difference between the two is that in the case of a regular plan, your AMC or mutual fund houses pay a commission to your broker in the form of distribution expenses or transaction fees beyond your investment, whereas in the case of a direct plan There is no such commission paid.
Instead, in the case of direct plans, commission is added to your investment balance, which reduces the expense ratio of your mutual fund scheme and increases your returns over the long term.
Investors can invest in direct fund mutual fund schemes without including distributors or mutual fund brokers. They are required to visit the AMC website and follow the process of investing in mutual fund schemes. But in 2018-19 again there are big changes like products like Paytm, ET Mani and Zerodha Coin, you can also invest in direct plan and since KYC is already sung for the use of these “apps”. No further processing is necessary.
No disbursement fee or trail fees will be paid to mutual fund brokers for such mutual fund schemes. Due to this, the expense ratio will be lower as compared to regular schemes. And investors will get higher returns than regular plans. Returns can range from 0.5% to 1.5% annually and depends on the AMC expense ratio.
There will be no transaction fee for lump sum investment or SIP investment in mutual fund schemes made through these direct plans as the transaction is done directly with AMC. There are some mutual fund middlemen who do not charge transaction fees as they depend on trail fees.
There will be a separate NAV for direct plans. The scheme will denote “direct” in its statement at the end of such direct plans.
Average expense ratio of regular and direct mutual fund schemes:
|Fund Category||Regular plan||Direct plan||The difference|
Source: Value Research, 31 March 2019 data
What are you getting when you invest through a regular plan?
- Investment Recommendations: The performance of a mutual fund varies greatly and the choice of which fund to invest in it is important. Planning (regular or direct) is a secondary consideration. The choice of a good fund versus a bad fund can make a difference of 4-5% in returns over time.
- Investment services such as periodic reviews or rebalancing: By reviewing your portfolio and helping to counterbalance you, your advisors will further improve the performance of your holdings and get you more profit. This can easily be worth another 1-2% return over time.
- Additional services such as facilitating your investment, tracking your portfolio and account changes: It is not just a question of saving time and effort. Most people simply will not do so and neglect their portfolio, resulting in poor returns and sometimes even losing money because they do not have a record of their investment.
Therefore, if you are a hardworking investor with deep knowledge, which means that you can choose and track your own mutual fund, then a direct plan is preferable. The advisor does not provide any additional value and is not worth their fee. However, for most people, relying on someone’s recommendation is the only option.
If that person or organization knows what they are doing and is not being influenced by other factors such as what they earn, then you will get good service and potentially earn more on your investment than what you yourself. Can be done through direct plan. In that case, the advisor has earned his fees and it would be better for you to invest in a regular plan.