What are Direct plans in Mutual funds?

(Last Updated On: September 15, 2017)

Indian Mutual Fund Industry has come a long way since its introduction in 1963. From a single asset management company enjoying a total monopoly of the sector to a range of diversified products being offered by both domestic and global companies. With time, the domestic MFI have innovated themselves to suit the most modern needs of the investor. One such reform happened in mutual fund sector in 2013 was the introduction of Direct Plan by SEBI. This is regarded as one of the most important reform in the sector which helped the industry to innovate and scale new heights. So, What are Direct Plans in Mutual Fund and how much it is beneficial?

Introduction

Direct Plans in Mutual Fund are meant for those investors who want to invest directly in the funds of Asset management company (AMC) without any assistance from financial advisor or distributor. The direct plans are simply an extension of the existing regular plans. Investing in direct plans helps the investor to increase the return percentage on investment up to 100 basis point or 1 percentage points compared to regular plans. This is because the AMC does not need to pay commission to the distributors and pass on the benefit to the investor.

The main objective of introducing Direct Plans is to have reduced expense ratio compared to regular plans. Direct plans are well suited for financially aware investors, who can make up their investment decision effectively and doesn’t require any type of third party advisory on mutual funds. Direct Plans are only available on open-ended schemes of the AMC.

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How does it work

The direct plans are about having reduced total expense ratio (TER) and increased return on investment. Expense Ratio of a mutual fund includes management fees, marketing fees, operating expense and commission to distributors. TER for Equity Funds can be maximum 2.5 percent and Debt fund can charge up to 2.25 percent and largest component of the expense ratio is management and advisory fees.

Details on commission received by distributors from AMC are always disputed. According to an official from SBI MF, A fund with AUM of more than Rs 2000 crores has TER of 1.8 to 1.9 percent after operating expenses, of which 1 to 1.5 percent goes towards the distribution cost and remaining comes under asset management fees.

Is Direct Plans are suitable for Retail Investors?

Most retail investors in the market are not much familiar with the market scenarios and risk associated with investment in mutual funds. And, investing in markets with half baked knowledge can be dangerous and the net result can be a loss of investment. In a quest to earn extra percentage point on the return you may lose more. Only investors with good knowledge on financial market are suggested to take the direct plan route.

As on January 2017, 65 percent of the asset by Institutional and HNI investors invested through Direct plans and only 12%of investment by retail investors are done through the direct plan.

Pros and Cons of investing in Direct Plan

Pros

  • Greater returns compared to regular plans
  • Easy Access to schemes of the fund house directly from websites
  • No misselling of investment products by distributors or attempt to change your perspective on investment
  • Low Expense ratio and elimination of intermediaries from the investment process
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Cons

  • Need to complete the paper work like KYC related documentation and investment forms without any assistance
  • Need to decide on the schemes and funds independently
  • Can run the risk of choosing a wrong product which can hamper your investment objective
  • Had to monitor the fund regularly and look for any deviation affecting the performance of fund

How to Invest

One can directly invest in direct plans through the websites of mutual fund companies or offices, Computer Age Management System (camsonline.com), Karvy and through MF utilities.

Best Direct Mutual Fund Plans

Direct Plans are no different from Regular plans. And the only difference is low expense ratio which translates into a higher return for investors.  All the best mutual fund schemes in different categories of the fund be it Large Cap, Mid-cap or Multi-cap gives a good return on investment. Some of the top performing Direct plan funds are:

 1 year Return3 year ReturnExpense Ratio
Birla SL Frontlife Equity Fund19.97 %16.85%0.96
SBI BlueChip Fund16.96%18.50%1.12
HDFC Mid-Cap Opportunities27.52%24.30%1.26
SBI Magnum Midcap Fund14.97%23.40%1.17
HDFC Balanced Fund23.16%17.80%0.87
Birla Sun Life Balanced '95 Fund18.12%17.80%0.98
Birla SL Equity Fund27.27%20.10%0.99
Birla Sun Life Advantage Fund25.53%23.99%1.03

Conclusion

As we have gone through the details of the direct plan, it is clear that direct plans are the clear winner against regular plans for the investors. But, the risk associated with the investing in Direct Plans for retail investors cannot be ignored because every investor does not possess required knowledge of financial markets and is not possible to track the changes in funds regularly. Whereas institutional investors and HNI have easy access to data and hence can take care of their portfolio efficiently. Thus, a small investor should judge all the factors before investing in direct plans as greed to earn extra 1 percent can weigh down the return on investment significantly.

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