Direct Plans in Mutual Funds are best for those who want to increase mutual fund returns by investing directly through AMC and want to do documentation on their own.
Three years back SEBI has come out with several reforms which includes introduction of direct plans in mutual funds. While investors have started investing through direct plans, investors still have several doubts and questions about direct plans of mutual fund schemes. What are the features direct plans in mutual funds? Who should invest through these direct plans of mutual fund schemes?
What are Direct Plans in Mutual Funds?
Asset management companies (AMC) allowed direct investments in mutual fund schemes much before 2011. However there was no separate plans for these investments. These investments were made in distributor plan itself and were tracked with single NAV- the one of the distributor plan. Hence an investor was bound to buy mutual funds based on the NAV of the distributor plans. However things changed with introduction of direct plans on January1, 2013.
Mutual fund direct plans are those where AMC / mutual fund Houses do not charge distributor expenses / trail fees / transaction charges. NAV of the direct plan would be higher compared to a regular plan. However the investment objective and investment mix of the scheme portfolio would be same for direct or regular plans.
Features of Direct Plans in Mutual Fund Schemes
Investors can directly invest in mutual fund schemes of direct plans without involving distributors or mutual fund brokers. They need to visit AMC website and follow the process to invest in mutual fund schemes.
There would not be any distribution fees or trail fees paid to mutual fund brokers for such mutual fund schemes. Due to this, expense ratio would be lower as compared to regular plans. And investors would get higher returns compared to regular plans. The returns would be higher between 0.5% to 1.5% p.a. depending upon the AMC expense ratio.
There would not be any transaction charges for lump sum investment or SIP investment in mutual fund schemes done through these direct plans as the transaction is directly done with AMC. There are some of the mutual fund intermediaries who do not charge transaction charges as they would depend on trail fees.
There would be a separate NAV (Net asset value) for direct plans. The scheme would denote “Direct” in its description at the end of such direct plans.
Who should invest in such direct plans of mutual fund schemes?
Direct plans in mutual funds are good for investors who wish to invest in mutual fund schemes by directly dealing with AMC without intermediary / mutual fund brokers.
These are good for investors who want to increase their returns by way of reducing expense ratio.
In these direct plans, investors should do their own analysis and select top performing mutual fund schemes. The investor needs to depend upon mutual fund websites or blogs to get to know about good mutual fund schemes.
Investor can invest in direct plan who can take care of the documentation process on their own. It includes submission of mutual fund applications, tracking, portfolio consolidation, nominee inclusion or modification, change of address, KYC compliance issues, etc., Since everything is now online, one need to follow some process and start investing in direct plans.
Concluding remarks: Direct Plans in Mutual Funds are best for those who want to increase mutual fund returns by investing directly through AMC and want to do documentation on their own. While the process may look little complicated in the initial stages, it should be easy while investing in subsequent schemes.
The author of this article is founder of Myinvestmentideas.com. He can be reached at firstname.lastname@example.org for any clarifications.