Mutual Funds

‘Direct’ plans of MFs trump ‘regular’ ones in SIP returns sweepstakes

Dhuraivel Gunasekaran BL Research Bureau | Updated on October 21, 2019 Published on October 21, 2019

Since direct plans involve no intermediary commission, their returns have beaten those of regular plans by up to 12 per cent

Investors who chose the direct route to invest in mutual funds have a reason to smile. Systematic investments (taking the Systematic Investment Plan route) in the direct plans of top equity funds have delivered much higher returns than the SIPs made in the regular plans of the same funds, over the past almost seven years.

Data from ACEMF show that direct plans of more than 50 funds from the universe of 250 equity-oriented funds have generated 7-12 percentage points higher returns (in absolute terms) than their regular counterparts. We analysed the SIP performance of equity-oriented funds from January 2013 (when direct plans were introduced) to date.

Direct vs regular

Mutual funds have traditionally been sold through advisors who get paid a commission from the mutual fund house. The commissions are deducted as expenses from the schemes’ NAV, which, in turn, reduces the return made by investors in the scheme.

Starting January 1, 2013, the market regulator mandated mutual funds to launch ‘direct’ plans for all schemes. Investors got the opportunity to buy schemes directly from mutual fund companies at lower costs (expense ratio). Under the direct plans, the commission paid to intermediaries is excluded from the expenses charged to investors, thus leading to a difference in the expense ratios. This results in direct plans earning higher returns than regular plans, thanks to the effect of compounding. For instance, a monthly SIP of ₹10,000 made in the direct plan of Invesco India Financial Services Fund that was started in January 2013 has now grown to ₹14.8 lakh.

 

On the other hand, identical SIPs during the same period in the regular plan of the same fund has accumulated ₹13.8 lakh. The direct plan has generated 12 percentage points higher return, or ₹97,204 more, than the regular plan.

The regular plan under Invesco India Financial Services Fund charges an expense ratio of 2.6 per cent currently, while its direct plan charges only 1.5 per cent.

With SEBI’s new rules on total expense ratio (TER) with effect from April 1, 2019, most schemes, especially regular plans, have cut the expenses they charge for managing their funds.

The regulator has sought to rationalise the expenses charged by mutual funds, based on their asset sizes. This has led to a marked reduction in some slabs.

For instance, the TERs of regular plans of open-ended equity funds with assets under management (AUM) of ₹2,000-5,000 crore and ₹5,000-10,000 crore have been trimmed by 1.6 per cent and 1.5 per cent, respectively.

The expanse ratio of the regular plan of ICICI Pru Value Discovery as of March 2019 was 2.26 per cent, which has now come down to 1.88 per cent (as on September 2019). The direct plan of the fund charges 1.37 per cent.

How to go direct

Almost all fund houses provide the facility to invest in direct plans in lump-sum and SIPs through their websites and mobile apps.

MF utilities — CAMS, Karvy and other online advisories and distributors such as Paytm, ORO Wealth, Bharosa Club, Unovest, Invezta, Groww and Clearfunds — enable you to invest in direct plans through their websites and mobile apps.

Published on October 21, 2019
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