Mutual Funds

MF investors prefer ‘direct’ approach

Anand Kalyanaraman BL Research Bureau | Updated on January 13, 2018 Published on February 26, 2017



Get more bang for the buck thanks to saving on commissions to intermediaries

Direct plans of mutual funds have been steadily gaining market share. These plans accounted for nearly 40 per cent of the money managed by mutual funds during the December 2016 quarter. That’s up from 35 per cent in the December 2015 quarter.

Their share now is more than twice the 15 per cent share in the March 2013 quarter, when direct plans were introduced, reveal data from industry association AMFI and rating agency Crisil. Ergo: mutual fund investors are increasingly buying directly from fund houses and not through distributors. With good reason: direct plans give better bang for the buck than regular plans, as they help save on the commission paid to intermediaries.

This reduces the expense ratio and improves returns. The savings in the expense ratio — that can exceed 0.5 per cent of the net asset value (NAV) in debt funds and 1 per cent in equity funds — can compound into tidy gains for direct plans over the long term. For instance, in the case of the ICICI Prudential Focused Bluechip Fund, the annualised return over three years in the direct plan is 20.14 per cent compared with 19.04 per cent in the regular plan.

Nearly all mutual fund categories have seen an uptick in direct plans. In debt-oriented funds, where institutional investors and high net worth individuals dominate, the share of direct plans picked up quickly in 2013 itself and has increased steadily since.

From about 55 per cent in the December 2013 quarter, direct plans accounted for 65 per cent of liquid funds’ corpus in the December 2016 quarter. In other short-term debt categories, too, they now account for over half the assets under management.

Besides, they have doubled their share in long-term debt funds to almost a third of the corpus. Close to 90 per cent of the direct plan assets are in debt funds, most of it in the short-term categories, where institutional investors put the most money. Says Jiju Vidyadharan, Director — Funds and Fixed Income Research, Crisil, “Institutional investors account for the larger share of direct plans. This is primarily due to higher awareness about the plan and the ability to invest in the most efficient way.”

Besides, institutional investors likely have to go by their board mandate of minimising costs.

Equity fund surge

But the sharpest growth has been in equity funds, where retail investors participate much more than in debt funds. From just about 3 per cent in the December 2013 quarter, direct plans have quadrupled their share to more than 13 per cent of the equity funds’ corpus in the December 2016 quarter.

Market players attribute this to moves by regulator SEBI over the past few years to increase awareness and reduce costs for investors. “A larger swathe of investors has been opting for direct plans over the past two years, prodded by concerted investor advocacy on the part of SEBI,” says Jayant Pai, Head — Marketing, PPFAS Mutual Fund.

Ease of investing through online modes has also aided the shift. Says Jimmy Patel, CEO of Quantum AMC: “With the advent of innovative technology, mutual fund houses are now making investing simpler. Gradually, investors are becoming more informed, due to the rise in the investor education and awareness initiatives.”

Pai concurs, “The advent of online investing in mutual funds has induced other categories of investors such as retail and high-net-worth individuals to choose direct plans”. Besides, he adds, “Early adopters among equity investors who are witnessing the perceptible difference of a lower expense ratio on their wealth are serving as evangelists for retail investors.”

But direct plans may not be for everyone, and could backfire on the investor if the fund selected turns out to be a poor performer. “Investors who do not understand the product would be better off with the help of a financial advisor,” cautions Crisil’s Vidyadharan.

Published on February 26, 2017
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