While mutual fund houses have launched direct plans for investors since January 2013, many people are still not aware of such plans. A survey conducted by Paisabazaar.com found that 96% of its consumers were not aware of the existence of direct plans of mutual funds.
As the expense ratio of direct plans is lower than regular plans, the returns are higher in direct plans. Direct plans do not involve any commission or distribution fees. In regular plans, the fund houses pay commission to the broker which is paid from the investor’s money. Direct plan can be made in all open-ended schemes, including new fund offers and even an systematic investment plan can be done in a direct plan. By investing through SIPs, investors will not have to worry about timing the markets as they will get the benefits of rupee cost averaging which reduces the impact of market ups and downs.
Higher returns in direct plans
As a result of lower expense ratio, the net asset value (NAV) of direct mutual funds is always higher than in regular plans. An analysis shows that the difference in returns between direct plans of mutual funds and regular plans would be `68 lakh for an SIP of `10,000 for 25 years, at an annualised return of 15%. The corpus created through direct plans will be `3.97 crore as compared with `3.29 crore via regular plans. “While a commission of 1-2% in regular plans may seem insignificant initially, returns from direct plans can easily be 18-20% higher in the long run,” says Yashish Dahiya, co-founder & CEO of PolicyBazaar Group.
The survey, which had over 25,000 respondents, was conducted for all non-mutual fund consumers of Paisbazaar.com last month. Dahiya explains that while everyone in the industry is aware that direct plans offer better returns than regular plans, there’s hardly been any consumer awareness initiative around it. The challenge is to make consumers aware of the distinct advantage direct plans have in the form of higher returns.
Direct plans can be bought from the company’s website. The investor will have to decide on the fund and register at the fund’s website and do the KYC. While filling up a mutual fund application form, one has to tick in the direct plan box. If one is choosing the physical mode, it is advisable to strike out the box for distributor code on the top of the application form or write the word direct in the box. There are portals that offer offer robo-advisory financial planning services to invest in direct plans.
Online direct plan investments are much easier as they can be completed within a few minutes. Online direct plan investments also allow investors to receive the unique benefit of same day NAV provided the investment is made within the scheduled cut-off in timing. This benefit is usually not available in case of offline investments and can help investors to gain if they manage to time their investment properly.
In direct plans, investors should do their own analysis and select top performing mutual fund schemes. In direct plans, investors will have to track NAVs,manage portfolio consolidation and do KYC compliance all by themselves. Such plans are ideal for those who are looking at higher returns in the long-run and are well aware of the market and fund trends.
Before 2013, mutual fund companies allowed direct investments but there were no separate plans. Investments were made in the distributor plan and there used to be a single NAV. The markets regulator mandated direct plans with separate NAV from January 2013.