What are direct plans?

These plans are for those who want to invest directly in a scheme without an agent’s help


We understand that mutual funds (MFs) are complex creatures and that you might need help before buying them. But there are many among us who don’t need help. They claim that they are comfortable in going to the fund house directly and choosing a fund ourselves. Such people are called direct investors, and since they don’t take a distributor’s help in deciding or buying a fund, they shouldn’t be charged any sort of commission.

It’s been more than a year since direct plans were introduced in the Indian MF industry. Effective 1 January 2013, all asset management companies (AMCs) launched direct plans for all their open-ended MF schemes, a move which was made mandatory by the capital markets regulator, Securities and Exchange Board of India (Sebi), through a circular it had issued a few months prior.

A direct plan is meant for those investors who wish to invest directly in a fund house without an agent’s help. Earlier, investors could invest directly, but trail fees was still deducted from the investment because these investors as well as those who came through agents subscribed to the MF scheme through a single net asset value (NAV). The direct plan will have a separate NAV, which will be higher than the normal plan’s NAV as its expense ratio is lower.

The story so far

As per data provided by Computer Age Management Services Ltd (Cams)—one of India’s largest registrar and transfer agents in the MF industry—direct plans have made significant progress in liquid funds and debt funds.

Around 52% of liquid funds and ultra short-term funds lie in direct plans as of end-December 2013, up from 31.1% as on end-January 2013. Direct plans’ corpus in debt funds has risen to 26.5% of the overall corpus, up from 5.5% during the same period. Direct plans haven’t yet made a significant dent in equity funds though. Just 2.3% of the overall equity funds’ corpus lies in direct plans, up from 0.8% during the same period. The Cams data has taken into account 91% of the total industry’s data.

Exchange-traded funds (ETFs) do not offer direct plans. Direct plans have not been introduced for ETFs because they are listed and traded on the stock exchange. Interval funds—or closed-end funds that open for subscriptions and redemptions for a limited time—will offer direct plans when ever they open for subscription hereon.

How to opt for them?

Ensure that you don’t write any agent code in the box at the top of your application form where agent codes are written. The rules laid down by Sebi also state that your distributor or financial adviser cannot submit a “direct” application form on your behalf. You can opt for direct plans when you buy MF schemes from your fund house’s websites.

However, not all online avenues offer direct plans, even though you buy schemes on such portals yourself. Financial supermarkets do not offer direct plans. Many banks also offer you a choice of MF schemes on their websites which you can buy using Internet banking. Since banks are distributors, they cannot offer you direct plans.

Where to submit?

You need to go to your fund house’s office to submit your direct MF application. You can also go to your fund house’s registrar and transfer agent’s offices. Remember, even if you go to these places to submit your application form, but if your distributor code is written on the form, it will not be considered as a direct application.

Direct plans not star-rated

You can track your scheme’s star rating on websites of MF tracking firms such as Value Research and Morningstar India. But you won’t find star ratings of direct plans, though, anywhere on their websites. The reason why they have not yet started rating direct plans is that these plans do not have a track record. Most tracking firms mandate at least a three-year track record for a scheme to get a star rating.

However, Value Research has started to give tentative or what they call provisional ratings to direct plans. These ratings are the same as that of regular plans’ ratings, for any particular scheme.

If you wish to invest through a direct plan, we suggest that you check the star ratings of the regular plan of the same MF scheme in places where direct plans don’t yet come with a rating to get an idea.

Since the difference between regular and direct plans is just the expense ratio, the star ratings are not expected to be vastly different.

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