Shyamal banerjee/Mint
Shyamal banerjee/Mint

Big investors shift towards direct plans

Retail investors haven't yet warmed up to direct plans. Ignorance and small gains are reasons

Ten months ago, when the 8.07 trillion Indian mutual funds (MFs) industry started offering direct plans across MF houses and their schemes, it offered a cheaper way to those of us who wanted to invest in MFs without a distributor’s help. Though it’s a bit too soon to ascertain its success, the direct plan has started to make an impact in some quarters of the MF industry.

As per data provided by Value Research, a MF tracking firm, institutional investors have shifted their money to direct plans. The small retail investor hasn’t yet shifted to direct plans, but the move has started; those who are aware of the facility have started to move already.

The percentage of corpus in direct plans of liquid and ultra short-term schemes (these are the schemes where institutional investors such as large companies and banks invest) to the overall money that’s there in these schemes have gone up from 34% at the end of March 2013 to 46% in June 2013 and 45% in September 2013. The corpus in these schemes’ direct plans grew from 1.05 trillion to 1.24 trillion in the same period.

Retail investors haven’t quite warmed up to direct plans yet. Equity funds—where retail investors typically invest—have seen the corpus of their direct plans grow from 2,063 crore in March 2013 to about 3,400 crore in September 2013. The corpuses that lie in direct plans of equity funds constitute just 1-2% of the overall equity funds’ corpus. “I think as a proportion, direct plans have definitely risen, but it’s been more in the institutional segment compared with the retail segment", says Saurabh Nanavati, chief executive officer, Religare Invesco Asset Management Co. Ltd. Nanavati says that retail investors have in fact been leaving MFs, withdrawing their money so the impact of direct plans on retail MF schemes, such as equity funds, has been negligible.

Limited awareness

One reason, some fund insiders say, why direct plans in equity funds haven’t really taken off is lack of awareness. “Apart from institutional investors who are very much aware of direct plans, some high net worth individuals have also come into direct plans of ultra short-term schemes and short-term bond funds. But retail investors are completely ignorant about the direct plan. The challenge is how to reach out to them. Distributors earn through trail fees, so it’s obviously not in their best interest to educate customers about direct plans," says Rajan Ghotgalkar, managing director, Principal PNB Asset Management Co. Ltd.

It’s a different story in the case of large investors though. Treasuries of large companies and banks have been known to invest 50-100 crore and upwards in liquid funds on a daily basis to manage their liquidity. A back of the envelope calculation shows that a firm that invests, say, 100 crore in a liquid fund for a week that earns 8% annualized returns stands to save roughly about 18,000 in just a week by investing in a direct plan. If the same money stays invested for 15 days, the firm saves a little over 38,000 in just a fortnight.

But retail investors put in smaller sums. If you invest 1 lakh in an equity fund that earns you about 20% compounded returns in 10 years, you would save about 36,000 by investing in a direct plan over 10 years or about 3,600 a year. Also, 1 lakh invested in a bond fund that earns you 12% compound interest over a period of 10 years would result in a savings of about 12,000 over 10 years or about 1,200 a year if you invest in a direct plan. These are rough numbers; your savings depend on market movements and how long you stay invested.

Who does it appeal to?

New Delhi-based financial planner Surya Bhatia says that he does get inquiries from his clients about direct plans. However, he feels that if distributors and financial planners demonstrate value in the services that they can offer to clients, the clients prefer to stick with them.

“The queries are few and far between. For an individual to track and manage her portfolio can be a big pain. Once an investor goes to the direct plan, we cannot track the portfolios," he says.

Mumbai-based financial planner Kavitha Menon, who also charges fees to her clients for their financial planning same as Bhatia, doesn’t agree. “It’s not difficult at all. This is just a mental block that investors can’t manage to invest and track on their own. There are websites that allow you to manually key in your portfolio details and then you can sit back and keep monitoring them. Further, registrar and transfer (R&T) agents of fund houses give you mail-back services; just key in your email and you will get a consolidated account statement in your email. What more do you want?" says Menon.

Once Menon advises her clients, she nudges them to invest in MFs through direct plans. A typical high net worth client, she says, who invests about 5 crore in an equity fund for a period of 10 years and earns about 20% return, saves about 1.78 crore over the period or about 18 lakh a year by investing in a direct plan. We ran some numbers on these assumptions; the savings go up to 41 lakh a year or 94 lakh a year, if you stay invested up to 15 years and 20 years, respectively.

What should you do?

If you follow Mint50 (Mint’s chosen set of 50 MF schemes) closely, then the direct plan is meant for you. Since direct plans aren’t even a year old, the difference in returns given out by direct plans and regular plans is negligible. But over a period of time, the difference will widen. “It’s important that investor who invests in the direct plan is internet savvy", says Menon who feels investing through the fund house’s websites and using the Internet banking would help.

The downside here is that you need to go to each fund house’s website and invest. But that’s just a one-time exercise though; systematic investment plans are automated and you can get consolidated account statements from your R&T’s website. If you aren’t comfortable using the Internet or want the convenience to invest across all MFs through an online portal such as FundsIndia.com or Fundsupermart.com (they offer only regular plans) or want your distributor to invest on your behalf in case you insist he or she tracks your investments regularly, stick to regular plans.

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