In January 2013, Securities and Exchanges Board Commission of India made it mandatory for every Asset Management Company (AMC) to offer a way for its clients to invest directly into their plans, rather than only through a brokerage/agent. Recently, there has been a rise in the number of people opting for the new way to invest, with the majority still apprehensive due to the lack of confidential information. Here are some key differences between Regular and Direct Mutual Funds, to help you make your decision-
- Key Operational Difference: In both the options, you are investing in the same fund, with the same fund manager, who will further invest in the same securities. The difference comes in the way the client opts to invest in/approach the fund.
You can either go directly to the AMC of your choosing (direct option) or rely on a professional to procure a fund for you and do the proceedings (regular option).
- Expense Ratio: Since the AMC you have approached through an agent has to pay the agent a commission (commonly quoted as “transaction fees”, “distribution fees” etc.), the expense ratio is higher in case of Regular Mutual Funds. This fee is either declared upfront or charged as hidden costs, i.e. deduced directly from the value of your NAV. This counts as an extra 1-2% in the expense ratio. In direct Mutual Funds, these fees are not charged, thereby, bringing down the expense ratio and increasing your NAV.
Direct plans have no such fees as there is no middle man to be paid.
- Returns: Apart from the increase in NAV with the reduction of the expense ratio, returns are further increased when this added amount is compounded.
The extra fees you are paying to the agent, when compounded over several years, can lead to a sizeable amount of money which would be lost in case of regular plans.
Professional advice: The extra amount being paid to the agent is simply as the value of professional advice, similar to what you might pay a doctor, lawyer, CA, etc. for Brokers/Agents provide 3 main benefits as value added services-
1. Investment Recommendations: Some people would choose comfort over having to put in the time and effort to research the best choice of Mutual Funds for themselves. Agents provide a way to escape that and let the professional make choices for you.
2. Periodic review and rebalancing: Again, you are too busy or for any other reason unable to track your investment an agent could be of great help as they do it for you, also recommending action.
3. Portfolio Management, facilitating investment, etc: Agents facilitate the investment process by dealing with AMCs themselves and saving you time in exchange for money.
Should I go for the direct plan for just that extra 1%?
The gap in the returns generated by the direct plan may seem nominal in the short-term which range somewhere between 0.75%-1.50% but this gap brings about a huge difference in the long run due to the power of compounding. In almost all of the mutual fund schemes, the returns are compounded back to the principal amount which generates greater returns as compared to the regular scheme.
How can I invest in a direct plan of mutual funds?
Follow these steps in order to invest in the direct plan of mutual funds:
- Login to your piggy account
- Select the fund you want to invest in
- Choose the mode of investment as a direct plan
Are direct plans of mutual funds suitable for all investor types?
As far as returns are concerned, the direct plan provides with a better return rate but these work well with investors who have some workable knowledge of mutual funds and the industry. A little know-how of how the market works and moves is desirable in order to reap the best benefits of the direct plan. You can try piggy premier if you seek professional help.
What are the drawbacks of the direct plan?
The only drawback that can be framed out of a direct plan is investing in the unfit fund. In the expectations of higher returns, investors generally tend to make some decisions which are not right at least for their portfolio type and risk appetite. This should not be the case if you do a little homework about the fund you are going to invest in. if you feel you are not able to deduce the best out of the information available, seek professional help.
If timing the market is not your thing or you feel that even after doing the homework, the results are not as promised and unfortunately your portfolio suffers some losses, then it is better to switch to a regular plan guided by an advisor to cater to all your needs. Of course, the benefit of all these is contingent upon the skill of the agent, so if opting for the Regular Plan, make sure you trust your agent.
Others willing to put in the time and effort to choose what’s best for them, or alternatively hiring a Mutual Fund Advisor instead of an agent, should go for the Direct Plan.