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Regular vs Direct Mutual Fund Plans - Which one to choose?


mutual-funds-direct-plans-regular-plans

Consider you are investing lump-sum or SIP into mutual fund regular plans.

What are you missing out on?

You forgot to track the most important thing, Expense Ratio. Here is the Wikipedia definition "The expense ratio of an asset fund is the total percentage of fund assets used for administrative, management, advertising and all other expenses. An expense ratio of 1% per annum means that each year 1% of the fund's total assets will be used to cover expenses."

Now, let's look the expense ratio of the below funds, which clearly indicates that direct funds charge a lower expense ratio. Looking for best performing funds - Best Mutual Funds to invest in 2018

Mutual FundDirectRegularDifference
Reliance Small Cap Fund1.00%2.00%1.00%
SBI BlueChip Fund1.15%1.97%0.85%
Kotak Select Focus Fund2.32%1.13%1.19%


When you invest via regular plan, the Mutual Fund house needs to factor in the trail commission it must pay to the the distributor or the agent for getting them the business. And this commission is earned by transferring a lower return to a regular fund investor vs a direct fund investor. Let's see how this works?
Here is a snapshot of Kotak Select Focus Fund on 10th May, 2018. The change in NAV was -0.48% with respect to previous day value.

mutual-fund-kotak-select-focus-direct-plan







Now let's look at the regular plan of the same fund, it fell 0.01% more. This is how, the commission is collected slowly & steadily to be paid to the distributor.

mutual-fund-kotak-select-focus-regular-plan







Some of you would be thinking, ahh 1% yearly - who cares? 

If you had to choose a home loan & had two options, one offering 8.75% & other 9.75%, who would you choose? Obviously the one offering lower interest rates. Then why do you ignore the same criteria in mutual funds?

If you invest Rs. 10,000 in a monthly SIP with an average return of 14% in direct plans, the return at the end of 20 years would be 1.3 crore. And if you invest in regular plans, considering an additional 1% as the expense ration, the investment at the end of 20 years will be 1.1 crore. Now, consider the difference if you invest even more, you'll get your answer.

FAQ's on Direct Mutual Funds


Will the investment already made without distributor code in the existing regular plan be converted into the direct plan automatically?

No, all the existing investments will continue to be as is. If you wish to move into direct plans, you will either need to put in a switch request or manually redeem the existing investment and create a new SIP into direct plan. Please ensure you need to be vary of exit load while shuffling your investments.

I’ve already invested in Mutual Funds. Did I buy a Direct or Regular plan?

You would need to check the Consolidated Statement for your portfolio. The Direct Plan is usually stated clearly in the scheme name itself.

If you have booked your investments through an agent & you are not paying anything directly to him/her, there is a 99.99% chance that you have invested into regular plans and the fund house directly pays commission to the agent.


Why do Direct Plans have different NAV?

The NAV was same for Direct & Regular plans on the launch date of Direct Plans. Thereafter, based on the returns - the NAV values will differ. The above example also shows the NAV of a Direct plan is higher than a regular plan. However, as an investor you should focus on the percentage returns rather than absolute.

My agent tells me over the long term it doesn't matter whether you choose regular or a direct plan. I'm Confused!

There is nothing called as a free lunch. If you have taken services from a distributor, he needs to make something out of it. Either a direct monthly/annual fee or a distributor commission from the fund house. If you can't evaluate how to structure your portfolio, you should continue to take advise from your distributor and stay invested into regular plans. If you are a Do-It-Yourself kind of an investor, you need to switch to direct plans immediately & become your own advisor. 

Where do i buy Direct Mutual Fund Plans?

With the ease in KYC norms & e-KYC, investing into mutual funds is quite a simple process. Here are some platforms you can consider to invest into direct plans -

Directly through Mutual Fund Website - Investors can choose to register on the AMC (Asset Management Company) website. You can directly fill the form to select your mutual fund plan, investment amount, frequency and other details. You need to select the mode of investment as DIRECT instead of specifying the distributor code. It is advisable to always diversify your investments across different fund houses & for the same reason you will need to maintain multiple accounts across websites to manage your investments. Although, it is an ideal way to invest but getting a 360 degree view of your investments is a difficult task.



Mutual Fund Utility - All fund houses have come together to create a direct mutual fund investment platform called as MFU. You need to create a Common Account Number (CAN), which can be used for investment across all fund house to invest into Direct Mutual Funds. There is no additional fee levied on the investments made through this portal. New investors can find the portal quite confusing & not much investment insights are available as part of portfolio analysis. Here is the link - https://www.mfuindia.com/


Karvy or myCams - Both these mechanisms provide direct mutual fund plans. The limitation of both these platforms is they provide investment options only for selected fund houses. In case your asset management company is not listed on either of the portals, you will again need to split your investments across multiple platforms - which destroys the entire purpose.


MoneyFront - Moneyfront has almost all direct mutual funds available on it's platform. The drawback lies in it's pricing strategy. Currently they charge INR 100 per month which is billed annually. Umm..We understand not many investors will like this, specially the ones who invest periodically by analyzing the market conditions & the ones who don't put a huge amount into SIP's. The sole reason for investing in direct mutual funds is to save money, then why do you want to pay to the platform? If you wish to explore further, here is the link https://www.moneyfront.in/


Zerodha Coin - You could choose to invest into both regular and direct plans through the Coin platform. If you wish to invest into direct plans, you will be charged a monthly fee of Rs. 50 post first INR 25000 investment. Again going back to the same point, if i'm starting an SIP of Rs. 500, will i be happy to pay Rs. 50 monthly. NO!! Here is the link - https://coin.zerodha.com/


KUVERA - A GAME CHANGER! Yes believe it or not, you can invest into direct mutual fund plans at zero cost. The sign up process seems pretty easy & the verification process is as fast as it can get. The direct plans of all fund houses are available on their platform. You could also import your existing portfolio by uploading Karvy's Combined Account Statement. The dashboard provides meaningful insights on the portfolio performance. I have personally switched all my existing SIP's to this platform & this is my RECOMMENDATION. Here is the link - https://kuvera.in/


With gaining popularity, many other platforms have opened up which offer direct plans. Even PayTm has announced a new mutual fund investment platform to be launched soon. Read - Will Paytm's foray into mutual funds shake up the industry?

Unless you need an agent or distributor to guide you, Go DIRECT!!

Mutual funds as an investment instrument has been gaining popularity over the years, thanks to the wide range of options available and the ease of KYC process. To know more about them, check out The Mutual Funds Sahi Hai campaign, launched by The Association of Mutual Funds in India (AMFI) at www.mutualfundssahihai.com

Still have any questions or feedback on the article, don't forget to share it in the comments section below.





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