Save Smart. How to go direct in mutual funds

Those investing in the direct plans of mutual funds have a reason to cheer. SIPs that were started in the direct plan of the top equity funds in January 2013 (when direct plans were introduced) have delivered 5-6 per cent (in absolute terms) higher returns than the SIP made in the regular plan of the same funds.

For instance, a monthly SIP of ₹10,000 made in the direct plan of Invesco India Midcap Fund that started in January 2013 has now grown to ₹12.1 lakh. On the other hand, identical SIPs during the same period in the regular plan of the same fund has accumulated ₹11.4 lakh. The direct plan has generated 6.4 per cent higher, or ₹73,431 more, return than the regular plan. Our analysis shows that direct plans of more than 25 equity funds have generated 5-6 percentage points higher returns (in absolute terms) than their regular counterparts. We analysed the SIP performance of equity-oriented funds starting January 2013 to date.

Thanks to lower expense ratio, direct plans lead to higher returns than their regular counterparts over the long term. However, direct retail participation is low in these plans with only 5 per cent of equity assets under management (AUM) of retail investors.

Direct vs regular

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 direct plans, the commission paid to intermediaries is excluded from the expenses charged to investors, thus causing a difference in the expense ratios.

Total expense ratio (TER) is the fee charged by fund houses to manage the investors’ money. The expenses — including investment management and advisory fee, trustee fee, marketing and selling expenses, distributor commissions, etc — are calculated against the daily average net assets of the fund. The NAV of each day is calculated after accounting for such expenses and hence, borne by the investors.

Currently, regular plans under actively managed equity funds charge expense ratio of 0.9-3.3 per cent. Since direct plans bypass the requirement of an intermediary such as a distributor, the commission paid to them is excluded from the expenses charged to investors. Currently, direct plans in actively managed equity funds charge expense ratio 0.1-1.9 per cent lower than regular plans.

For instance, the regular plan under HDFC Small Cap Fund charges an expense ratio of 2.3 per cent while its direct plan charges only 0.6 per cent. This makes a huge difference in the returns between direct and regular plans over the long run.

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

Ways to invest in direct plans

Registrar and transfer agents (R&T) such as CAMS and Karvy also allow direct subscriptions through their web portals and mobile apps. Investing through MF Utilities is a good choice as it facilitates investors to transact in multiple schemes of various mutual funds. Many online advisories and distributors also enable you to invest in direct plans through their websites and mobile apps for a flat or no fee. Paytm, ORO Wealth, Bharosa Club, Unovest, Invezta, Groww and Clearfunds are a few.

From regular to direct

Investors have the option to change the plans from regular to direct. For this, you have to sell the units of the regular plan and buy the units of the direct plan of the scheme. Please remember that exit loads, if any, will be applicable. Selling of MF units will also attracted capital gains tax.

Savvy investors who can cherry pick mutual funds on their own can opt for direct plans. Remember though that the expense ratio should not be your only criteria for choosing a mutual fund. A sound track record of consistent returns is critical to achieving your long-term financial goal.

Selecting direct plans of best-performing funds based on our ‘ BusinessLine Portfolio Star Track Mutual Fund Ratings’ can help you achieve your financial goal.

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