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Direct Plan from mutual funds - Good or bad?

There has been a lot of discussion around the launch of Direct plan of mutual fund schemes. Many are hailing SEBI's decision and few are complaining about it. Read this space to understand the concept of 'Direct Plan' and know the impact of the same on investors.

April 23, 2013 / 05:43 PM IST

There has been a lot of discussion around the launch of Direct plan of mutual fund schemes. Many are hailing SEBI’s decision and few are complaining about it. Let us try and understand what is the noise all about.

Brief recap;

From Jan 2013 mutual fund scheme will have separate NAV for existing schemes as direct plan. It may look like HDFC Equity Fund Direct plan (G). The direct plan NAV will always be lower than the regular plan NAV and the scheme will hold the same set of stocks/ bonds in the same proportion. The cost of holding your funds in direct plan will be cheaper than regular plan. Direct plan is expected to be cheaper by about 0.75% for equity funds and 0.50% for debt funds.

The direct plan NAV will be available only for investors who directly invest with the fund house without using the services of distributors and brokers.

Now how does it impact the investors?

Investors in direct plan will get relatively higher returns compared to the regular plan. The fund management charges of direct plan are lower than the regular plan and this is translated to higher returns in the hands of investors. The difference of 0.5-0.75% looks small, but since it is a recurring expense in the long run it can make a reasonable difference.
Assume one invests Rs 10,000 simultaneously in an SIP of regular and direct plan for 10 years. At the end the direct plan investor can be richer by around Rs 1.25 lacs.

This is where distributors seem worried. They claim investors will not want to use their services and will directly opt to invest. Partially they may have a reason to worry especially those who are catering to institutional and large investors, but still they need not panic.

Investors will like to pay someone if he adds value or provides certain service. Majority of the mutual fund investors have little financial knowledge or like to dedicate less time on these matters. Here the distributor may be of good value. He may help them short-list appropriate funds, track and review performance etc. He may help the investors in logistics; fill up the form, get it submitted, redemption etc. So there is scope for distributors to flourish.

Investors who have time and average knowledge can choose to invest in direct plan and earn higher returns.

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