Quintessential Advantages of Direct Mutual Fund Plan Over Regular Plans

Most, if not, every investor wants to discover the ideal way to invest money and get excellent returns without risking the principal. Although, a thing like high returns without high risk doesn’t exist except a fairy tale. On the other hand, most individuals do possess the right knowledge but do not have the time, and the rest do not have the time or the know-how to invest. For this, Mutual Fund has come a long way to ensure that this challenge is diminished by a great margin with various reforms made by SEBI in recent years.

The right way to enter equity markets as mentioned by Ajay Tyagi, SEBI Chairman, to investors on Mutual Funds. It is seen as one of the safest ways to get exposed to high-risk equity stocks. 

Since its inception, Mutual Fund Schemes originally came with a Regular Plan which is highly popular among many classes of investors, but the ambiance changed in 2013 when Asset Management Companies (AMCs) introduced the Direct Mutual Fund Plan for all open-ended schemes which effective from 1st of January 2013.

What Exactly Are Direct Plans and Regular Plans in Mutual Funds?

Let us take an example of a salaried individual namely Mr X. 

Mr X is an avid investor and takes a keen interest in investing and wealth creation. He possesses all the requisite knowledge, follows business affairs, understands his risk profile and has the experience to practice self-investing in Mutual Fund schemes. For Mr X, who is well informed, would like to invest using the Direct Plan in Mutual Fund without having to deal with Intermediaries or Mutual Fund Brokers. Hence, he can allow himself an expense reduction which would otherwise be incurred paying steady brokerage charges if he chose the regular plan. Say the costs amount to 1% which may seem like it’s not much initially, but its compounding effect during long-term investments will make a big difference. 

For instance, if you chose to avail a Regular Plan to invest Rs. One hundred fifty thousand on a mutual fund scheme with a yield of 15% compounded annually over the next 24 years with an expense ratio (distributor’s commission) of 2.4%, then applying the formula, you would get Rs. 31,68,791. While using the Direct Plan with an expense ratio of 1.1%, you would receive Rs. 32,10,998. So, you would be losing approx — Rs 42,207.17 of your hard-earned money when you opt for Regular Plan, and the difference gap only widens with time. Also, not to mention the LTCG will attract a 10% tax rate more than 1 lac without indexation benefit so you might like to retain to yourself as much as possible.

Therefore, while opting for Regular Plan, you will have to incur an extra expenditure on distributor expense, trial fee, transaction charges that get deducted from your fund’s valuation before reaching the Net Asset Value (NAV). On the other hand, the Direct Mutual Fund Plan will help to reduce this charge while focusing on higher Return on Investments as noticed in the example above. Here, you can invest directly and deal with Asset Management Companies (AMC) or mutual fund houses.

Let Us Look into Some of the Quintessential Advantages the Direct Mutual Fund Plans Have to Offer.

1. Higher NAV as Compared to Regular Plan

NAV which is Net Asset Value represents a Fund’s per share market value at which it is purchased (bid price) from Investment Companies and sold. It can be determined by calculating the fund’s total asset (cash and securities in a fund’s portfolio, fewer liabilities, if any) and dividing it by the number of units outstanding. By avoiding the brokerage commission or agent fees, the NAV can be increased. Therefore, while investing in the direct fund, your total investment value is higher due to higher NAV. As a result, it provides you with higher returns.

Chart Showing Difference of Net Asset Value of Regular and Direct Plan

NAV (Regular Plan)
As on 27.11.18
NAV (Direct Plan)
As on 27.11.18
Axis Bluechip Fund
Aditya Birla Sun Life Frontline Equity Fund

2. Expense Ratio of Direct Plan Is Lower

Another excellent benefit that is found in Direct Mutual Fund Plan is that its low expense ratio. In a regular plan, you are sure to get professional assistance and advise, but it would cost you around 0.5% to 1.2% of your investment. Since you deal with the AMC or Mutual Fund Houses yourself with the help of a direct plan, you avoid the cost of any transaction charges or Distributor Commission by directly engaging with the AMC itself. Hence, this leads to higher ROI during for long-term investments.

3.  The advantage of Attaining Higher Returns

While investing in a mutual fund scheme through Direct Plan can surely help you get a much higher ROI in comparison to the regular plan of the scheme. It is noticed that Direct Plan has the edge over its Regular counterpart. 

For example, Axis Bluechip Fund (Regular) gives an annualised return of 14.9% in 5 years while the Axis Bluechip Fund (Direct) gives a 16.3% annual ROI when invested for a tenure of 5 years.

4. You Have Ultimate Control over Your Fund and Portfolio

In the case of a regular plan, the fund manager’s expertise and experience should be considered without which your returns will diminish. You can even avoid fraudulent agents and misguiding assistance and take control of your fund. This can help you grow your expertise in investing and further encourage you to communicate and deal with the AMC directly. It provides a self-educative platform for you to continue growing your investment skills and rely on your research to be a better independent investor.  Although, there are efficient online sites and Financial Advisors that offers you free-of-cost assistance after charging a one-time registration fee if you ever need consultations regarding direct investments.

To Summarize:

Warren Buffet says “Risk comes from not knowing what you are doing.”. So, when you invest in Direct Mutual Fund Plans, be prepared with thorough research, assess your risk tolerance, investment horizon and on analyse the funds on which you’re investing. Although, it is not an uncommon fact, that there are no gains without taking a risk when investing in the equity market but with the proper skill and learning the art of investment, you can overcome all the challenges. Finally, choosing a Direct Plan to save on the extra expenses you incur proves to be more rewarding for the long term instead of availing a short-term mutual fund distributor service which increases your expense ratio and reduces your ROI by a good margin. Therefore, based on the technical aspects and returns, we recommend the Direct Plan any day but, in the end, it is your comfort zone that will help you take the final decision. Happy Investing! 

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