6 years ago, in January 2013 SEBI has come out with several reforms which include the introduction of Direct Schemes in Mutual Funds. While investors have started investing through direct schemes, investors still have many doubts and questions regarding the direct schemes of mutual fund schemes. What are Direct Plans in Mutual Funds? Who should invest through these Direct Plan of Mutual Fund schemes?
Mutual Fund Direct Plan or Regular Plan: Which to Choose? – Make Money
Regular and direct plans are just two options for buying 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 case of a regular plan your AMC or mutual fund house pays a commission to your broker as distribution expenses or transaction charges out of your investment, whereas in the case of a direct plan There is no such commission in the payment.
Instead, in the case of a direct plan, the commission is added to your investment balance, thereby reducing the expense ratio of your mutual fund scheme and increasing your returns over the long term.
Investors can invest in mutual fund schemes with direct plans without involving distributors or mutual fund brokers. They need to visit the AMC website and follow the procedure to invest in mutual fund schemes. But in the year 2018-19 again there were big changes like you can also invest in Direct Plans through products like Paytm, Et Money and Zerodha Coin and since KYC is already done for the use of these “Apps” so It is not necessary to do any other procedure.
No distribution fee or trail fee will be paid to the mutual fund brokers for such mutual fund schemes. Due to this, the expense ratio will be lower as compared to regular plans. And investors will get higher returns as compared to regular schemes. The returns can be as high as 0.5% to 1.5% p.a. and depend on the AMC expense ratio.
There will be no transaction charges for lump sum investment or SIP investment in Mutual Fund schemes made through these direct schemes as the transaction is done directly with the AMC. There are some mutual fund intermediaries that do not charge transaction fees as they depend on trail fees.
There will be a separate NAV for direct plans. The Scheme shall denote “Direct” in its description at the end of such Direct Schemes.
Average Expense Ratio (Expense Ratio) of Regular and Direct Mutual Fund Schemes:
FundShare RegularPlan DirectPlan Difference
Equity 2.02% 1.22% 0.80%
Debt 0.90% 0.42% 0.48%
Hybrid 1.96% 0.98% 0.98%
Source: Value Research, 31 March 2019 Data
What are you getting when you invest through a regular plan?
Investment Recommendations: The performance of mutual funds varies greatly and the choice of which fund to invest in 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 helping you review and rebalance your portfolio, your advisors will further improve the performance of your holdings and bring you higher returns. It can easily be worth another 1-2% return over time.
Additional services like facilitating your investments, tracking your portfolio and account changes: It is not just a question of saving time and effort. Most people simply won’t do this and neglect their portfolio, which results in poor returns and sometimes even losing money because they don’t have a record of their investments.
So, if you are a diligent investor with in-depth knowledge, which means you can choose and track your own mutual funds, then the Direct plan is better. The advisor does not provide any added value and is not worth their fee. However, for most people, relying on someone’s recommendation is the only option.
If that person or entity knows what they are doing and is not influenced by other factors such as what they earn, you will be served better and potentially earn more on your investment than what you yourself would do. You can do it through direct plan. In that case, the advisor has earned his fee and it would be better for you to invest in a regular plan.