A decade on, how have MF direct plans fared? | Mint

A decade on, how have MF direct plans fared?

Direct plans now make up for half the industry’s assets. Photo: Reuters
Direct plans now make up for half the industry’s assets. Photo: Reuters


Mutual fund direct plans are set to complete a decade of existence 15 days from now.

Mutual fund (MF) direct plans are set to complete a decade of existence 15 days from now. On 1 January 2013, fund houses launched these plans in accordance with a Securities and Exchange Board of India (Sebi) directive. Direct plans allow investors to invest in MFs without paying commission to distributors. Such commissions vary, based on the type of scheme but typically help investors save about 0.5-1% per year on equity MFs and 0.1-0.5% per year on debt MFs. Over time, such savings can add up to a substantial amount.

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Direct plans now make up for half the industry’s assets. According to a Crisil report, about 46% of the roughly 40 trillion assets of the MF sit in direct plans (as of March 2022). This share is much lower at around 20% in equity MFs, where retail investors predominate and rely on distributor services. In debt MFs, cost conscious high net-worth investors (HNIs) and corporate treasuries lean towards direct plans.

A journey of direct MF plans
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A journey of direct MF plans

To be sure, direct plans did not take off in a big way after their launch. Fund houses shared data only with end investors and not with intermediaries offering direct plans and this could be one reason that hampered their expansion. An Amfi (Association of Mutual Funds in India) circular in November 2016 changed all this by allowing such data sharing.

Yet, it was the rise of direct fintech platforms such as Kuvera (launched in December 2016) and Zerodha Coin (launched by discount broker Zerodha in April 2017) that catapulted the growth of these plans. Initially Zerodha charged a monthly fee of 50 for investments above 25,000 but the brokerage firm abolished the fee in August 2016.

The digital-only mode lowered costs for such platforms and allowed them to forego distribution commissions. Such platforms largely operated under an investment advisor licence.

“Mark my words, the commissions saved by direct plans is going to be the single largest source of wealth generation for investors in India in the coming decades. The impact of direct plans on our portfolios will be of similar magnitude as that of John Bogle and Index funds for US investors," Gaurav Rastogi, CEO, Kuvera, a platform offering direct plans that counts a user base of 16 lakh and assets of 13,500 crore invested in direct plans through its advisor code, had said.

Despite the popularity of the direct plans, financial advisors were still sceptical. “Direct plans have enabled consumer choice and that’s always welcome. On the flip side, some new investors in such plans began acting on fear and greed impulses, bereft of any support from distributors or financial advisors. They’re a mixed blessing," said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

To be sure, direct plans are suitable only for those who can afford to research and shortlist the funds without help from an intermediary.

“One iron rule of finance is that costs matter. The launch of direct plans has been a boon for DIY investors and has helped them save thousands of crores in costs. It’s a no-brainer for DIY investors to invest in direct plans, just like it’s a no-brainer to seek help from an advisor or distributor if they can’t do it on their own," said Nithin Kamath, founder & CEO, Zerodha.

If you still decide to go ahead with direct plans for your existing investments as well in the regular mode, do note that switching from one plan to another is considered redemption and re-investing. Thus, capital gains tax and exit load applicable at the time of redemption are applicable at the time of switching too.

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