Why You Should Invest in Direct Plans of Mutual Funds

In 2013, SEBI made it mandatory for Asset Management Companies (AMCs) to issue a regular plan and a direct plan for every mutual fund. While a lot of investors jumped at this opportunity, many of us have yet to do so. So, here in this issue, I will talk about direct plans of mutual funds and their benefits.

Understanding Direct Plans

The investment objective and fund mix of a direct plan are the same as your regular plan. The differentiating factor is that in the case of direct plans, mutual fund houses do not charge transaction fees or distributor expenses. Also, the net asset value (NAV) of a direct plan is higher than that of a regular plan.

Benefits:

1. No intermediaries: You can start investing in a direct plan by logging on to the fund house’s website. You do not need to involve a broker or an agent. Thus, saving on brokerage fee.
2. Lower expense ratio: The absence of distributor fee translates into lower expense ratio compared to regular plans. For example, the regular plan of the Axis Long-Term Equity Fund has an expense ratio of 2.33% while the direct plan has 1.63% only.
3. Higher returns and NAV: Low expense ratios mean higher returns, which lead to higher NAV. Even a small difference in the expense ratios of direct and regular plans equals a huge gap in returns due to compounding. In the past two years, the annualized returns of the regular plan of Axis Long-Term Equity Fund have been 40.4% while the direct plan has given 42.2%. When you see this over the long term, say 10 years, this will result in a huge corpus!

Then, what’s the catch?

Though Direct Plans are a good option, there are some pointers you need to keep in mind:

• Separate registrations: For Direct Plans, you have to register with each fund house individually, including managing the documentation.
• No consolidated view: Individual registrations make it difficult to get one view of all your investments that a bank or broker may offer.
• No advice: You have to do your own analysis and identify top-performing funds

If you are an experienced investor, I would urge you to look at the benefits and invest in Direct Plans. However, if you are a new investor, you may first want to see other platforms, such as banks and independent brokers, offering ratings and advice to help you with your investments.

By Naveen Kukreja, Managing Director, PaisaBazaar.com

First published in Deccan Chronicle