Five costs associated with direct plans of mutual funds you should not ignore

Direct plans have emerged as the preferred means to invest in mutual funds. While corporate money has already switched to direct plans, individual investors too are latching up to direct plans. Especially, after the advent of digital means to invest in mutual funds, many individuals are seriously considering the direct plans of mutual funds. As per Association of Mutual Funds in India, 13% of money invested by individuals is in direct plans of mutual funds, as on April 2017.

Though the direct plans mean cost saving and better returns, you should not ignore the costs associated with it. “It makes sense to go for direct plan if you are keen on long term SIP in equity mutual funds. But if you are keen to dynamically manage your mutual fund investments by looking beyond traditional SIP, then you may have to do a lot of running around,” says Abhishek Gupta, founder and CEO of Moat Wealth Advisors. The indirect costs associated with direct plans of mutual funds cannot be ignored. Here are some of them:

Expense ratio

Mutual funds charge investors through expense ratio. It is expressed as a percentage of the assets under management and takes care of all costs associated with fund management. In case of direct plans barring distributor commission all factors are accounted for, that makes the expense ratio lower than the regular plan.

For example, HDFC Prudence Fund Regular Plan charges expense ratio of 2.26% whereas HDFC Prudence Fund Direct Plan charges expense ratio of 1.14%.

Though the direct plan’s expense ratio is lower, you pay the mutual fund. As the extent of outperformance by mutual funds goes down, the expense ratio becomes important. Always keep an eye on this number. Other things remaining the same, lower expense ratio is better for investor.

Your efforts

Direct plans are for investors who are willing to work to put their money to work. You have to choose schemes basis your needs and do all the legwork that a distributor would have done otherwise. Be it visiting the website of the mutual funds and filling up the online forms, creating systematic investing plans among other things, are done by you. It requires resources in terms of money, efforts and time. Account for them.

Cost of advice

There are times investors chase returns. “Many investors invest in a mutual fund looking at past returns. However sometimes it back-fires,” points out Rupesh Bhansali, head of mutual funds, GEPL Capital.

He points out that investors opting for gilt funds looking at double digit returns last year, complain saying they are not making any returns. Investors pouring money in mid cap funds towards the beginning of current year, are now under stress due to fall in mid cap stocks.

Picking the right schemes and allocating right amount of money to each of them is a challenge for many. Some find it difficult to identify the right investment strategy – SIP or STP or dividend transfer plan. “If you are going to approach a Sebi registered investment adviser, you will have to pay his fees,” points out Rupesh Bhansali.

A financial planner may charge approximately Rs 10,000 to Rs 25,000 for such a service. An online fund recommendation service may charge you anywhere between Rs 5,000 to 10,000 rupees.

Cost associated with platforms

If you choose to invest across fund houses, which is a more likely scenario, you will have to register yourself on each fund house’s website. To avoid this scenario, you can use MF Utility platform. If you want to opt for an online platform that offers to invest in

If you want to opt for an online platform that offers to invest in direct option of mutual fund schemes, then you end up paying for it. The cost is in the range of Rs 600 per year to Rs 10,000 per year depending on the facilities on offer. Some claim it to be a free account, but charge you per transaction. Some insist on a demat account which comes at a cost of around Rs 500-Rs 600 per year.

Cost of compliance

Since mutual funds are tightly regulated financial products as compared with insurance and fixed deposits, many times investors are asked to furnish more information pertaining to know-your-clients norms. Investors have to furnish the same, failing which no new investments are allowed. For example, recently the investors are asked to furnish FATCA related details.

“When you invest through a distributor portal, you get consolidated mutual fund portfolio, capital gains statements and other such reports. This helps at the time of filing for income tax,” points out Abhishek Gupta. When you have a dynamic portfolio built using direct plans you have to take efforts to get the numbers right, as there are not many ready-to-use solutions.

To put it straight, if you have the inclination to invest on your own and want to see your money grow in long term, opt for direct plans. Direct plans and associated efforts make sense when you are investing large sums for long term. For small amount of money and dynamic investments you may be better off with a good distributor.