Amidst the volatile markets and global economic conditions, Indian mutual fund industry has seen a steady upsurge in investments in last decade. Globally, India has established its position as an investment destination. Though Mutual Funds industry existed in India for last 30 years, its only last decade that individual investors warmed up to this investment tool.
SEBI, the regulatory authorities for equity markets in India has played a major role revamping the mutual fund industry with series of reforms and making mutual funds a transparent, low cost and high yielding instrument for individual investors. I can write a full article on the reformative steps of SEBI for the mutual fund industry which irks the players but it has only helped retail investors in gaining confidence in the investment tool.
But, in this blog, I would like to focus on the specific reform of splitting schemes into regular and direct plans. The move not only made a lot of news, it opened a new era low cost investing where equity direct plans cost up to 0.5 -1% less than the regular funds and 0.2% on debt funds.
What is a direct plan and regular plan?
Beginning January 1, 2013, all the mutual funds mandatorily split its existing and new schemes into two with different NAVs (Unit price). The funds, when sold by the distributors were put into ‘Regular’ category, which included the upfront/trailing fee and transaction costs for the service of the broker/distributor. This is aimed at rationalizing broker’s cost for rendering his service.
‘Direct’ category for each scheme was created for investors who don’t take service of any distributor/advisor for mutual funds investment and buy from mutual fund office or online. They are not required to pay for the extra upfront/trailing charges for the services.
Direct Vs. Regular plan
Over time process of investing in a mutual fund has become easy but selecting the right products requires planning. Every mutual fund scheme has an investment objective and style. It is investor’s prerogative to choose right schemes based on his financial goals. However, brokers are often tempted by the upfront or trailing fee structure while suggesting funds.
The distributors and advisors played an important role here in choosing right product mix for their clients. However, an informed investor need not require assistance in investing. Hence, SEBI proposed separate NAV for Direct funds deducting the distributor related costs.
Illustration on how Rs. 10,000 grew from January 1, 2013 to December 2016 in direct Versus regular plans
Schemes – Large-cap equity mutual fund
|Birla Sunlife Frontline Equity – Growth||Percentage return in 3 years||Total return|
ICICI Value Discovery Midcap-smallcap fund
|ICICI Pru Value Discovery – Growth||Percentage return in 3 years||Total return|
HDFC Income Fund – Debt oriented
|HDFC Income Fund||Percentage return in 3 years||Total return|
Who should you buy a direct plan?
An informed investor should choose direct plans, as over a time period of five years the direct plans can give about 3-4 % extra return.
If you are not financially savvy, take professional help on financial planning from certified advisors for a fee, and then buy mutual funds direct plans. But if you still require assistance in buying and managing your investments, you should buy it with the help of a broker/distributor and choose ‘Regular’ plans.