Direct Mutual Fund Plans: Why You Should Take Note Of Them
- 4m0•
- 08 Feb 2023
Why are companies suddenly switching to selling direct plans for regular ones? Case in point being ETMoney and Groww. They both started off offering regular plans. In the former’s case, they were selling regular plans for three years while Groww were in the same market for almost a year.
What Is The Backstory?
Direct plans are not a fad. They are not one of those raging viral videos on the internet with a short shelf life.
In fact, right from the inception of mutual funds in the country, fund houses have allowed people to directly invest in mutual fund schemes. But it was on January 1, 2013, that these schemes actually came to being named as direct plans and were subsequently classified differently from regular plans.
How Are Direct Mutual Fund Plans Different From Regular Plans?
Direct plans and regular plans are two ways to invest in a mutual fund. The only difference between the two plans is the quantum of expense ratio.
If you buy a regular plan, there’s an expense ratio attached to the investment. That’s because the mutual fund house needs to pay a commission to the distributor or the agent for getting them business.
Direct plans, on the other hand, does not include the distributor’s commission. That’s because you buy the mutual fund scheme of your choice directly. There are no agents involved in this case.
This is the only difference between a regular and a direct plan. The rest of the features are similar in nature: the exit load is the same, the return on investment is identical and so are the risks involved and the underlying assets.
What Difference Does An Expense Ratio Make?
The distributor commission usually ranges between 0.8% and 1.5%. Therefore, if you buy regular plans, you’d receive lesser returns if compared to direct plans.
However, some people may think it’s an insignificant percentage to worry about. But let’s show you a calculation to illustrate that’s not the case.
Example: Say, you invest Rs 10,000 every month in a mutual fund via the SIP route. If the rate of return is 12% and the time horizon is 20 years, you’d receive roughly Rs 1.21 crore if you had bought a direct plan and Rs 99 lakh in case of a regular plan. That shows that you’d save roughly Rs 22 lakh if you had invested in a direct plan. Therefore, even a slight lower expense ratio can make a huge difference in the long run.
Word Of Caution
The above example may have whetted your appetite for direct plans. But you need to careful because these plans are not for everyone. That’s because you need to have some knowledge about the market. You need to have time to research by sifting through hundreds of mutual fund plans in the market.
If you can’t do that, it is better to take help of agents and pay a larger expense ratio. This way, you can ask your agents to complete the documentation process and keep a tab on how your investment is faring.
Will There Be A Revolution In The Mutual Fund Universe?
As stated earlier, direct plans are not a new phenomenon. But they have remained a relatively unknown quantity among retail investors — people who invest less than Rs 2 lakh in a stock.
A Mint reported took help of Prime MF database to state that the number of small investors buying direct plans have increased at a slower pace than high net-worth individuals (HNIs). The small investor numbers grew by just 10% in 2015-16 and 2016-17, though there was a jump of 80% in 2017-18. In contrast, the HNI contribution grew by around 70% in the last three years.
Last year’s data suggests that direct plans have gained traction among retail investors. Most likely, the numbers are set to increase even further because the access to buying direct plans has got easier due to entry of new players in the market, especially Paytm Money.
The growing competition in this space suggests one thing: the customer is the ultimate winner.
We don't know if there will be a revolution, but availability of direct plans at zero-cost would make mutual funds more accessible to small investors across the country.
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