Direct mutual fund schemes fare better than regular plans. Here is why

Investors who had invested in mutual fund schemes via direct plans will be elated as these plans have delivered better gains than that of regular plans in the one-year period ended March 29.

Typically, when an investor who wishes to invest in a MF scheme, she has to go through brokers or intermediaries/distributors/advisors. The intermediaries charge a brokerage fee for their services.

The distribution charges, trail commission are paid to the intermediaries by the asset management companies from investors’ money. This shaves a fraction off the returns investors earn.

On the other hand, direct MF plans don’t involve intermediaries. Hence, the expense ratio which includes all fees, commission, and fund management charges is lower, making the return higher than that of regular MF plans.

In the past one-year, direct schemes have given about 100 basis points of additional annual compounded return (a basis point is a hundredth of a percentage point).

Since direct plans have between 50 and 100 bps less of expense fees in the case of equity schemes and as there is no component of distributor commission, these tend to offer relatively more return to investors, on the back of a higher investible sum.

The varying returns are quite visible. For instance, top schemes like HDFC Top 200-Direct Plan gave 30.23 percent average returns while regular plan delivered 29.29 percent. Similarly, Reliance Equity Opportunities Fund-Direct Plan offered 19.65 percent vs 18.70 percent given under regular plan.

ICICI Prudential Dynamic Fund’s direct plan gave 32 percent average return as against 31 percent by regular plan.

Data Infographic by Ritesh Presswala

The Securities and Exchange Board of India has been pushing for availability of direct plans to investors for several years.

As on January-end, 65 percent assets by institutional and HNI investors were in direct plans. However, only 12 percent of investments by retail investors are through the direct plans.

“Usually, HNIs and institutions opt for direct plans. There are very less retail participants who are aware about these direct plans,” said Rajesh Krishnamoorthy, Managing Director, iFast Financial India, a platform provider for independent advisers and MF distributors.

He further said that these plans are yet to pick up momentum among investors in a widespread manner.

The primary reason is lack of financial literacy among potential investors, particularly non-wealthy individuals.