Jitendra PS Solanki
Direct plans in mutual funds were introduced in 2013 with an objective to provide low cost investment options to investors who were not using intermediary services for transactions. Prior to 2013, such savvy investors were forced to invest in regular plans which were sold by distributors. But as the new regulations stepped in, the investment advice got completely separated from the product selling and with it came the choice to the investors. Now one is free to seek advice from an expert and make a choice of investing in direct plans or through a distributor- no more compulsion of any kind.
How they benefit?
First let’s ponder upon the real benefit of direct plans. Regular plans are sold by the distributors and hence the expense ratio of these plans account for the distributor remuneration. The direct plans however does not have the element of distributor remuneration. Hence direct plans have lower expenses to the tune of 0.5 to 1%. This translates into better returns offered by direct mutual fund schemes as shown in the below table for large cap category-
The difference may appear trivial in the short term, however in the long term this one percentage point difference can be significant.
Let’s understand this using an illustration which is based on simple calculations-
Ravi has been investing Rs 5000 monthly in regular plans while his friend Abhishek started investing same amount in direct plan. Both have a target of 25 years for the accumulation. If we assume Ravi will get returns of 9% on his investment then it will be fair to assume that 0.5% lower expense will translate into a 9.5% return for Abhishek. So in 25 years the accumulation for Ravi will be Rs. 53,26,542 through regular plans while in the same horizon Abhishek will accumulate Rs 57,52,572 i.e. a corpus higher by Rs 4,26,030. Put simply a difference of approximately Rs 4 lakh is created with 0.5% difference in the return. With higher difference in expenses this gap will widen.
Thus, by investing through direct plans one is able to accumulate higher. In a short period say 5-6 years this gap may not look large but in the long term the compounding effect will play its role.
The hurdles
Yes, there are some hurdles too while investing in direct plans. However, one must note that every big transition takes time to ease out. In the current scenario there is no standalone platform for making your transactions in direct plans and so you have to visit respective company website or registrar like CAMS to invest in these plans. For KYC compliance and investing for first time in some mutual funds, a visit to registrar or company office is required. But such visit is required only when you are investing for the first time. Beyond this, the ride should be relatively easy for an average investor. Registrars like CAMS & Karvy have also simplified monitoring by giving you consolidated statements. Thus, once you are invested in mutual fund schemes, it is easier to monitor and make further transactions in your mutual funds schemes without making a visit to any office.
It’s not far when investors in direct plans will see emergence of platforms for this option. Direct plans are for your benefit and there is no reason why you should not be investing. There are strong reasons for direct plans then against it. Despite the efforts required on the investors part, it is worth taking a bet.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
