What Young Investors Should Know About Direct Plans of Mutual Funds
What are the direct plans of mutual funds
In October 2012, SEBI took a bold decision in the interest of investors by asking mutual fund companies to issue a separate “direct” plan for all their schemes. The investor needs to purchase these plans directly from the mutual fund company, resulting in zero involvement from the distributor/middlemen. This allows the mutual fund company to charge a lower expense ratio from the investor. The company doesn’t need to pay the commission to the distributor.
What are the advantages of direct plans?
As per the April 2021 Factsheet of HDFC Mid Cap Opportunities Fund, the expense ratio applicable for the regular and direct plan is 1.79% and 1.08%. This amounts to a difference of 0.71%. Consequently, the return of a direct plan will be more than that of a regular plan by this margin. Let us assume that you invest INR 10,000 per month for the next 20 years in both plans. Let us also assume that the return for the regular plan is 10%. Given the difference in expense ratio, let us assume the return for the direct plan to be 10.71%.
In such a scenario, the corpus accumulation in direct and regular plans will be as follows:
|Plan Type||Assumed Return %||Corpus Value (INR)|
This means that if you invested in a regular plan, you lose out on INR 7.38 lacs over 20 years ( ~ 8.86% of the total corpus value under the direct plan). This difference is significant enough not to be ignored. Hence, from a returns perspective, it makes a lot of sense to invest in direct plans.
What are the disadvantages of direct plans?
- Advice regarding schemes suited to your financial profile
- Assistance on investment, which includes completing the necessary paperwork etc.
- Reminding you of your investment due dates
- Helping you renew your SIP once the period is over
- Handholding you in difficult market situations
Take note: You do not get the above support when you invest in direct plans.
Should you shift to direct plans of mutual funds?
#1: Going direct:
#2: Staying with the regular plan:
#3: Going with Direct Plans + Engaging a fee-only adviser:
What should you keep in mind while shifting to direct plans?
- Selling your mutual fund investment can cause taxation and exit load implications. If you have a substantial portfolio, you may proceed as per the guidance of an adviser to minimise the loss.
- Investing in direct plans can cost you heavily if you are not diligent enough, as you may end up choosing low-performing schemes. This can make it a “penny-wise-and-pound foolish” decision.
- If you stick to a regular plan, you have the right to demand full service for the higher expense that you bear. Be willing to change your mutual fund distributor if you don’t find the services of your existing distributor effective.