Existing investors in regular plans should shift their investments to direct plans. The power of compounding kicks in and the direct plans beat their regular plans by a substantial margin over the long term.
A recent survey by Paisabazaar.com has revealed that an overwhelming percentage - 96 per cent to those surveyed - of mutual fund investors were unaware of the very existence of ‘Direct Plans’ of mutual funds. Direct plans allow you to circumvent intermediaries and invest directly in the scheme of your choice resulting in higher wealth in the long term.
Paisabazaar pointed out that by ignoring direct plans for ‘regular plans’ through brokers/distributors investors are losing out a huge accumulation possibility since the intermediary fees would be added on and compounded over a period of time.
According to calculations, the difference in returns between direct plans of mutual funds and regular plans could be as much as Rs 68 lakh, for a SIP of Rs 10,000 for 25 years, at an annualised return of 15%. Thus, the corpus created through direct plans will be Rs 3.97 crore Vs Rs 3.29 crore via regular plans.
So, if you are one of the investors who have been ignorant about direct plans and investing through regular plans or are a new investor what should be your course of action? We asked Naveen Kukreja, CEO & Co-founder, Paisabazaar.com, on what he would advise such investors. Here are his views:
Is it advisable for existing investors who have are invested in regular plans to redeem and shift to similar direct plans or stop one’s SIP and put it in direct scheme?
Yes, existing investors in regular plans should shift their investments to direct plans. The expense ratios of direct plans are usually around 1% lower than their regular counterparts. As the savings made through the lower expense ratios of direct plans remain invested in the fund, they themselves start generating returns leading to higher growth. The power of compounding kicks in and the direct plans beat their regular plans by a substantial margin over the long term.
What are the costs associated with the churn for the investor?
Switching from a regular plan to a direct plan may have tax implications for the investor in the form of short-term and long term capital gains tax. However, the gains associated with lower expense ratio over the long term would nullify the tax impact.
Does it make sense to shift only if one is an early investor ie invested for only a couple of years or could be done at any time?
Investors should consider shifting from regular plan to direct plan, irrespective of their time horizons. Any incremental investments in their existing funds too should be invested in direct plans due to their lower expense ratio and higher returns.
If so what should be the process for shift from agent/broker to direct plan?
Investors registered online with AMCs and Registrar & Transfer Agents (RTAs) like CAMS etc. can directly log in to their mutual fund account and place a switch request to convert their regular plan to a direct plan. The same facility is available with online marketplaces, which offer direct plans for free.Those without online registration can register themselves with the AMCs and RTAs for online access and switch request. Those who are uncomfortable with online process can fill up the Common Transaction Form of the concerned AMC and submit/send it to the offices of the concerned AMC or RTA.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.