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.
Continue reading your story on the app
Continue reading your story in the magazine
Warning Signs That You May Be Underinsured
Underinsurance is described as a scenario in which individuals have insufficient insurance coverage and even if they have some insurance, it is not sufficient to give their dependents financial security in the case of an emergency
Investing In New-Age Businesses
Out of the ₹1.3 lakh crore raised via IPOs throughout the year 2021, roughly 33 per cent of it was cumulatively raised by eight new-age companies such as Paytm, Zomato, Nykaa, PB Fintech, Car Trade, Fino Payments Bank, Nazara Technologies and Easy Trip. Does this indicate that it’s a red carpet walk for all new-age companies? It may seem so but as Armaan Madhani and Shreya Chaware point out, investors need to study a slew of factors before parking their funds in this space
A Blueprint To Accomplish Your Financial Goals In 2022
Setting realistic financial goals is one of the finest methods to get control of your finances. We are sure many of you have no idea where to begin with your money. Continue reading to find out how to achieve your financial goals in the year 2022
Virus Variant Impacts Domestic Recovery
Tata Motors overtook Hyundai to become the second-largest seller of passenger vehicles in the domestic market for the first time in close to a decade
The ‘Show And Sell' Strategy
Do professional sales galleries help sell housing projects? How important is a good site office to sell a residential or commercial project? Sunil Mishra, Head–Strategy, ANAROCK Group, has the answers
MICA Values And Strives For Adaptability And Unlearning
Interview Dr. Preeti Shroff Professor and Dean, MICA – The School of Ideas
It Is Very Important To Focus On Upskilling
Interview - Karun Tadepalli CEO and Co-Founder, byteXL
Investment Over Investment Returns
The most fundamental aspect that impacts wealth creation and is ignored by a majority of individuals is the investment amount. Undoubtedly, return is a crucial factor but if you desire to create a huge corpus you have to invest a huge corpus over period of time
GRINDWELL NORTON - DRIVEN BY VALUE-ADDITIONS
The abrasives industry in India currently has two major players offering a full range of abrasives products, one of which is Grindwell Norton which has a leadership position in several product-market segments
Disruption Has Its Financial Roll-Outs Too
Technology-specific advancements are now the major breakthroughs in an increasingly digital society. As such, keeping an eye on stocks that are related to technology companies makes sense. Kaustubh Bhosale elucidates how the global economy is undergoing the most significant technological transformation in history by virtue of multiple innovation platforms evolving simultaneously
GAMECHANGER KWEISI MFUME
Politician, legislator, advocate
Sebi notifies stricter norms for MD post at listed firms
Putting in place stringent norms, Sebi has said that a person rejected by shareholders at a general meeting can be appointed or reappointed as a managing director or whole time director or manager, only after providing detailed justifications and ensuring compliance with various conditions
Overseas investment cap for MFs may be doubled
Sebi may raise industry-wide limit from $7 bn to $12–15 bn
MUTUAL FUND NEWS
LIC IPO to hit markets by Mar; DRHP likely by Jan-end
SEPTEMBER QUARTER FINANCIAL RESULTS BEING FINALISED, FUND BIFURCATOIN IN PROGRESS
New entrants to drive future of MF industry
The industry is seeing several new entrants, which are adopting a technology-driven approach to disrupt the space
Sebi notifies vault managers rules; allows bourses to set up gold exchange in India
NEW DELHI: Markets regulator Sebi has notified rules for vault managers that allow bourses to set up a gold exchange in the country.
गोल्ड एक्सचेंज की स्थापना का रास्ता साफ, नियम अधिसूचित
भारतीय प्रतिभूति एवं विनिमय बोर्ड (सेबी) ने वॉल्ट (तिजोरी) प्रबंधन नियमों को अधिसूचित कर दिया है। इसके तहत शेयर बाजारों को देश में गोल्ड (स्वर्ण) एक्सचेंज स्थापित करने की अनुमति होगी।
‘ESG is a noble investment strategy that scores on performance and morals'
Investing in companies that do well on environmental, social and governance (ESG) standards is a comparatively new theme in the Indian market. We speak with Swarup Mohanty of Mirae Asset Mutual Fund to understand what it offers, how rewarding it can be, and how it has performed in overseas markets.
आईपीओ नियमों में किया बदलाव
भारतीय प्रतिभूति एवं विनिमय बोर्ड (सेबी) ने वर्ष की अपनी आखिरी बोर्ड बैठक में सार्वजनिक शेयर बिक्री के लिए मानकों को सख्त बनाया है।