A Paisabazaar survey of its non-mutual fund customers has shown that 96% of them are not aware of the direct plans of mutual funds. Direct Plans do not charge distributor commissions to investors in the way that regular plans do. The Paisabazaar survey covered 25,000 customers of its non-mutual fund businesses.
Direct v Regular Plans
Distributor commissions of roughly 0.5% per annum are charged for debt funds and 1% for equity funds. This percentage is charged on the fund value and deducted before the NAV is declared. The commission is pooled along with other fund expenses and forms part of the expense ratio of the fund. As a result regular plans of mutual funds have higher expense ratios than direct plans.
Although the percentage can seem small on an annual basis, over time it gets compounded to a large share of your returns. The percentage is also large when compared with return rather than total fund value. For example assume that a Rs 1 lakh investment earns Rs 10,000 in a year. A 1% distributor commission will amount to Rs 1,000. If you compare Rs 1000 to the return of Rs 10,000 rather than the total fund value of Rs 1 lakh, you will find that a much higher share is lost to the distributor. This share is 1% of the fund corpus but as much as 10% of your return.
Changing Investor Picture
Data released by Paisabazaar also reveal a young and first time investor-led demographic profile of mutual fund investors. Many of them live outside India’s major cities.
“67% of mutual fund investors on Paisabazaar come from outside Top 30 cities, with a median age of the total investor base at only 29 years. 47% of them are first-time investors. This conveys a simple message – Today, consumers, from across age bands and geographies, are getting more and more confident in buying financial products on their own,” said Naveen Kukreja, CEO & Co-founder, Paisabazaar.com