The direct advantage

Today, High Net-Worth Investors (HNIs) have another investment avenue open to them: the direct plans of mutual funds, which allow investors to bypass distributors, reduce the cost of investing in funds, and get higher returns.

Asset management companies came out with these schemes after a January 2013 directive by the Securities and Exchange Board of India asked them to launch direct plans for all existing and new schemes. Mutual funds now offer schemes under both regular as well as direct plans.

The direct plans have been a hit with HNIs and institutional investors, who now constitute close to 25 per cent of the industry’s total assets under management.

Direct plans

Until January 2013, people could invest in various regular plans either via a distributor or directly through the fund’s own offices. But investors did not reap any benefit by bypassing intermediaries.

But since the SEBI ruling, if an investor opts for the direct plan he stands to gain, as the expense ratio of a direct plan is lower than a regular plan to the extent of the distribution cost. Remember, schemes incur various costs: professional fees, audit fees, marketing costs and distribution expenses. Direct plans have lower costs for investors because they save on distribution charges.

“The resultant saving is 0.05-0.1 per cent in the case of liquid funds, 0.4-0.5 per cent for debt schemes and up to 1 per cent in the case of equity funds,” says Rajmohan Krishnan, co-founder and managing director, Entrust.

Over time, the Net Asset Values of schemes are thus correspondingly higher for direct plans. Mutual fund houses declare two NAVs — one for the regular plan and the other for the direct one.

Why HNIs may benefit

Direct plans have seen substantial inflows since January 2013 due to institutional investors and some HNIs shifting to these less expensive plans.

HNIs may prefer them for three reasons; one, they may be informed investors and able to make investment choices on their own. Or, they may have wealth managers who handle their entire portfolio for a fee to help with fund selection.

Two, HNIs invest more in debt and gilt funds, where expenses can make a significant difference to returns.

The third reason HNIs can benefit more from these plans is because they invest larger sums of money.

Thus, over a period of time higher benefits accrue to them due to the compounding effect. With direct plans only commencing in January this year, data on performance are limited.

HNIs should continue to choose funds for their return record. But analysing how a fund has performed using a direct plan may be difficult given the limited track record. It will, therefore, be better to look at the regular plans of each of these schemes, which will have a longer track record of performance.

“If the underlying scheme is doing well, automatically the direct plan will generate better returns. In fact, the best fund will be the one that has top quartile performance with the lowest direct plan expense ratio,” says Krishnan.

Opt for the direct route if you are sure about which funds to invest in. Be sure to also assess the track record of the fund manager, consistency in performance, and pedigree of the AMC before selecting a scheme.

Why?

HNIs are informed investors or have services of wealth managers

For big investors in debt/gilt funds, low distribution cost can make a difference

Magnified compounding effect on large investments

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