Difference between direct and regular mutual fund plans
Effective 1 January 2013, all asset management companies (AMCs) have launched direct mutual fund plans for all open-ended schemes
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Two weeks ago, Sebi chairman Ajay Tyagi said at an annual mutual fund conference that the mutual funds (MF) industry isn’t doing enough to spread awareness about direct plans.
All mutual fund schemes mandatorily come with two plans—direct and regular. Effective 1 January 2013, all asset management companies (AMCs) launched direct mutual fund plans for all open-ended schemes. Before 2013, only the regular was around. A regular plan is meant for those who invest in a fund through their distributors. These plans, therefore, come embedded with distributor commission that gets deducted from your fund’s valuation before arriving at its net asset value (NAV).
But what if you wish to invest on your own? To cater to such investors, Sebi asked all fund houses to come out with direct plans. A direct plan does not come with distributor commission. Its expenses are lower than those of the regular plan. Say you invest ₹ 1 lakh in a fund that returns 14% compounded over the next 20 years. A direct plan (assuming an expense ratio of 1.5%) would give ₹ 10.54 lakh, as against ₹ 9.14 lakh from a regular plan (expense ratio of 2.3%). That’s a difference of ₹ 1.4 lakh.
How to access a direct plan?
You can go to every fund house’s website, register there by filling in your basic details and start buying funds. Or you can go to Mutual Funds Utility, the mutual fund industry’s platform to invest across schemes, after opening an account there. There are also several portals that offer direct plans like Oro Wealth, Invezta and so on. These and few other portals allow you to invest in direct plans, but charge a flat fee. For instance, Oro Wealth has a basic plan that allows you free transactions of up to ₹ 1 lakh. Any transaction done beyond this (aside from liquid funds), are charged at 0.15% of the transaction value. There are other plans where Oro Wealth helps you plan your investments and give advice; these come for a fee. Invezta too has multiple plans; the basic plan allows you free transactions up to ₹ 50,000 (including liquid funds). Then you have to pay a flat fee of ₹ 79 per month. Portals like the MFU and MyCams (run by Computer Age Management Services; one of the two largest R&Ts) are free, but don’t offer advisory services.
Should you invest in a direct plan?
If you can research, choose and invest on your own, direct plans are for you. Keep your temperament in check, especially in volatile times and keep up with the good habit of investing regularly.
But if you do not have the wherewithal of selecting funds or you can’t decipher markets, it’s best to go to an advisor. Even Sebi-registered investment advisors offer direct plans, but they charge an advisory fee on the overall portfolio. That is also a good option. Else, if you have a good distributor who handholds you, it’s best to stick to them instead of venturing out on your own.
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