From January 1 this year, all mutual funds were asked to offer a new Direct Plan with their schemes so that investors could bypass the services of a distributor, save on costs and thus earn higher returns from their funds.

But 10 months on, while a good number of institutions and affluent investors have moved their money into direct plans, very few retail investors have made the shift.

In equity funds, where retail participation is the highest, just 3 per cent of assets had moved into direct plans by end-September. Data from the Association of Mutual Funds of India show that direct plans held Rs 2.11 lakh crore, about 26 per cent of the industry’s total assets. But only Rs 5,600 crore of this was from equity funds.

Liquid funds, which companies use for treasury management, have seen 53.5 per cent of their total assets move to direct plans since January. Fixed Maturity Plans, preferred by HNIs, have seen 41.6 per cent of assets take the direct route.

Agent commissions

Moving into direct plans can make a significant difference to returns from a fund over time. These plans carry lower recurring costs as they don’t charge annual agent commissions. Commissions typically take away 0.05-0.10 per cent of the Net Asset Value (NAV) every year in the case of liquid funds, and 0.40-0.50 per cent for debt funds. Commissions are the highest in equity funds, where they can reduce annual returns by up to 1 per cent.

“Institutional investors or companies have no choice. If there is a low-cost option, their boards will question them if they don’t take it,” said a Marketing Head with a mutual fund. While companies may go direct to avoid uncomfortable questions, HNIs seem to opt for direct plans because they already have portfolio managers who charge a separate fee for managing their money.

Rajmohan Krishnan, Co-Founder and Managing Director of Entrust Family Office Investment Advisors, says HNIs usually have full -fledged portfolio managers who advise them on asset allocation and fund selection. They can pay a flat advisory fee to the manager and invest online through direct plans. They need not use distributors or agents.

Retail stays away

But why have retail investors not taken a fancy to direct plans despite their better returns?

Suresh Sadagopan, founder of Ladder 7 Financial Advisories, a leading financial planning firm in Mumbai, says retail investors see the savings from direct plans as small and don’t want to forego the convenience of having an advisor who helps them select and transact in funds.

“If you look at it mathematically, it will definitely make a difference. Saving 0.5 per cent for 15-20 years will mean a couple of lakhs added to your wealth at the end. But for a retail investor who is not savvy about investments and who doesn’t have the platform to transact online, an advisor’s services are still crucial.”

“I think that lack of help in fund selection is the biggest impediment to moving to direct plans. Lack of aggregation and the hassle of having to deal with different fund houses for grievances are also obstacles,” says Srikanth Meenakshi, Founder and COO, FundsIndia, an online mutual fund transaction platform.

At FundsIndia, he says, just half a per cent of the investors have moved any money into direct plans. Of these, less than a third have completely moved their assets over. “In equity funds there is a wide variance between good and bad funds and this makes advice a critical requirement in the investment process.”

(This article was published on November 3, 2013)
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