Direct mutual funds are gaining popularity. A recent newspaper report said direct plans now form 39% of all assets under management. Debt mutual funds formed a large part of this, but there’s been a surge in direct plans for equity mutual funds as well, which are now 12% of all AUM, up from 7.6% in March 2015.
Earlier, corporate and institutional investors preferred the direct route. But now an increasing number of retail investors are also preferring this path.
In this article, we’ll take a look at what direct mutual funds are, what their costs benefits, and how investors can opt for them.
A brief note on direct mutual fund plans
Typically, when an investor wants to buy mutual funds, he has to go through brokers or intermediaries. The intermediaries charge a brokerage free for their services. The distribution charges, trail commission etc. are paid to the intermediaries by the AMCs from investors’ money. This shaves a fraction off the returns investors earn.
On the other hand, direct MF plans don’t involve intermediaries. Hence, the expense ratio (which includes all fees, commission, and fund management charges) is lower, making the return higher than that of regular MF plans. This is the reason why direct MF plans are surging.
How investors can invest in direct MF plan
Every mutual fund company offers the same mutual fund under two categories; namely regular and direct. You can directly buy a mutual fund from the fund house itself and not through an intermediary. You can either buy the mutual fund online or by visiting any of their offices. You can either fill separate forms for buying under the direct plan or fill up the same form clearly mentioning the same. The executives from the companies will guide you in most cases.
You will notice that the NAV of a direct MF plan is higher than that of the regular plan. NAV, or Net Asset Value, is the unit price of a mutual fund. This is calculated after subtracting the expenses of managing a mutual fund from the market value of underlying assets. Naturally, the NAV of a direct plan will be higher.
The advantages of a direct plan
The expense ratio of a direct MF plan is lower, resulting in higher returns for investors. On average, the difference in returns can be anywhere between 0.5% and 1.5%. This may not look very big, but it can make a huge difference in the long run, especially if the invested sum is sizeable.
Consider a scenario. A monthly SIP of Rs 10,000 in a regular mutual fund scheme, if maintained consistently for 10 years, will turn into approximately Rs. 23 lakh if compounded at the annual rate of 12%. Now, suppose everything is unchanged, except that the SIP is done in the direct MF plan (of the same fund). Assume that the direct plan gives returns of 13% CAGR. In this case, the final amount after 10 years will turn out to be 24.40 lakh. This is a difference of 1.4 lakh.
This may still not sound much. But imagine continuing the same plan for another 10 years. The difference then would be Rs. 14.40 lakh. This the power of compounding that even a difference of 1% can make. If the difference in rate of return is more, the difference in the final amount will only be more pronounced.
There is no denying that direct MF plans are more profitable than regular ones. The only advantage of a regular plan is that your financial planner takes care of all the administrative work for you. However, if you can invest a little time and effort, direct MF plans can do wonders for you.
The author is CEO, BankBazaar.com