MF Direct Investing – Demystified
Dalal Street Investment Journal|September 28, 2020
While investing in a mutual fund, it is important to understand the differences between direct plan and regular plan. For instance, investment in a direct plan helps an investor in two ways to generate better results than regular plan. The article outlines the broad distinctions between the two and how to invest in direct plan.

Capital market regulator, the Securities and Exchange Board of India (SEBI), has recently issued a circular that specifies the asset allocation that needs to be followed for the multi-cap category of funds. This has been done to make it ‘true to the label’. Irrespective of the outcome, this shows the proactive nature of SEBI when it comes to protecting investors’ interest. Exactly eight years back, one more such initiative was taken by SEBI in the interest of investors. In September 2012, asset management companies (AMCs) were asked to launch a ‘direct plan’ of their schemes. This came into effect from the start of the year 2013. The idea was to allow investors buy mutual fund schemes without any intermediary.

For these direct plans everything remained the same besides the expense ratio – be it investment objective, investment strategy, portfolio, exit loads, etc. Therefore, the direct plan includes those schemes where investors can directly invest in funds without involving any agent or intermediary. This allows investors to invest directly into mutual funds schemes without incurring the commission or brokerage cost that was earlier paid to distributors or banks. The funds which involved distributors or any intermediary become the ‘regular plan’.

Since funds with direct plan have lower expense ratio as compared to the regular plan, the net asset value (NAV) reported by the direct plan will be higher than the regular plan. This is because your NAV is the net of expense ratio, which means expense ratio is deducted directly from the fund’s NAV. Therefore, the lower expense ratio of the direct plan helps the fund to outperform the regular plans. This outperformance becomes bigger with time as the compounding effect kicks in.

Direct Plan and Returns

Investment in a direct plan helps an investor in two ways to generate better results than regular plan. First, the entire fund is getting invested in your selected fund and hence assuming returns are positive, future returns will be better with the growth of additional money. Besides, the lower expense ratio of the fund will help you add on every year. Our analysis of almost 230 equity-dedicated funds has shown that the average difference in returns between the regular and direct plan of a mutual fund scheme on a cumulative basis since 2013 is around 5 percent.

For example, a fund like Tata Retirement Savings Fund – Progressive Plan with regular plan has an expense ratio of 2.41 per cent whereas its direct plan has an expense ratio of 1.54 per cent. The difference between direct and regular plan in the last one-year return is 1.8 percent. The cumulative difference is around 13 per cent since 2013. The graph below shows the relative movement of NAV between the regular and direct plan.

Similarly, in the case of Mirae Asset Great Consumer Fund the difference of expense ratio between direct and regular fund is 1.54 percent and the difference in yearly returns is again 1.8 per cent while the cumulative return difference is 10 per cent. Despite such return differentials retail investors seems to be reluctant to adopt a direct plan. At the end of August 2020, individual assets were primarily driven by distributors where a commission is involved and formed 81 per cent of the assets of individual investors. Out of this, T 30 cities (T 30 refers to the top 30 geographical locations in India and B 30 refers to the locations beyond the top 30) brought in by distributors is 59 per cent while B 30 account for 22 per cent.

Direct investments amount to 19 per cent of individual assets divided as 3 per cent from B 30 and 16 per cent from T 30 at the end of August 2020. One of the reasons retail investors are yet to adopt the direct plan of a fund is their lack of confidence in selecting and investing in a fund. They still need persuasion and advice from agents to invest. Besides, what is also hindering their acceptance of the direct plan is lack of understanding on how to invest in a direct plan.

Investing in Direct Plan

There are different ways in which you can invest in the direct plan of a scheme. The process that you adopt will depend upon your confidence and comfort.

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