Lot of people have question on whether to buy direct funds of indirect funds. And like any other question, my usual answer is “It depends”. So what does it depend on?

Lets first try to understand what Direct Funds are.

What Are Direct Funds?

Few years back SEBI (the regulatory body that takes care of Investor’s interest) announced that Mutual Funds should have two options for every scheme they roll out. One called Regular Plan and another Direct Plan. There is only one difference between the two funds – the expense ratio, also called TER (total expense ratio) sometimes. In Regular Plans, expense ratio includes commission paid to distributors. Direct Plans, by definition are bought directly from Mutual Funds and hence expense ratio should not include commission paid toco the distributor.

For every scheme you look at, you will see two plans.

Should you buy Direct Plans?

There are many factors you should consider but in short – if you know what to buy, how much to buy, when to buy, when to sell – go with direct funds. Or if you have an advisor who can tell you what to buy, how much to buy, when to buy and when to sell – go with direct funds.

Now here is detailed answer:

Do you need someone to advice you?

Managing your investments is a very painful process. When I started investing I used to love managing my funds. But I started getting busy with my work and personal life, and my portfolio took a backseat in the process. If you are like me, most likely you will not have time to manage your investments. In such cases, it is better to go through a financial advisor or a distributor. You can pay for their services in two ways – directly paying for the service provided or letting them take commission from mutual funds (so called Regular plans).

You can do basic math and figure out what works for you better. Typically if your portfolio (basket of investments) is bigger, Direct Plans work out better because small percentage you save is quite large in absolute terms.

Are you an active investor?

If you think you can look at your investments actively, go with direct plans. In that case, you would probably not even be reading this post.

Expense difference between Regular plan and Direct plan?

For a lot of funds, the expense ratio difference between direct plan and the regular plan is not much. For instance, take any liquid fund – the expense ratio for both direct and regular is very low and hence the difference is also very low. Consider this liquid fund – Axis Liquid Fund – the expense ratio on the direct plan is .06% while on regular is .12%. The difference is .06%. For an investment of Rs 1Lac that is just Rs 60 for a year.

Some top funds in various categories with expense ratios

Fund Category Expense Ration on Direct Plan Expense Ration on Regular Plan
Axis Liquid Fund Liquid 0.04% 0.12%
ICICI Prudential Money Market Fund Liquid 0.15% 0.21%
HDFC Balanced Fund Balanced 0.89% 1.99%
ICICI Prudential Balanced Fund Balanced 1.04% 2.33%
Axis Long Term Equity Fund ELSS 1.28% 1.98%
Reliance Tax Saver Fund ELSS 1.45% 2.00%
DSP BlackRock Tax Saver Fund ELSS 1.98% 2.61%
ICICI Prudential Value Discovery Fund Equity 0.99% 2.25%
Kotal Select Focus Fund Equity 1.00% 2.00%
SBI Bluechip Fund Equity 1.10% 1.98%
Return Difference between Regular and Direct Plans

Logically, for investors what should matter is the return difference and not the expense difference. Because returns make the difference how much money you get back when you withdraw the funds. Let’s assume that you hold a fund for 3 years. Let’s see the difference in returns of some top funds

Fund Category 3Y Annual Return – Direct Plan 3Y Annual Return – Regular Plan
Axis Liquid Fund Liquid 8.61 8.54
ICICI Prudential Money Market Fund Liquid 8.6 8.53
HDFC Balanced Fund Balanced 26.39 25.29
ICICI Prudential Balanced Fund Balanced 23.67 22.37
Axis Long Term Equity Fund ELSS 30.05 28.45
Reliance Tax Saver Fund ELSS 33.87 32.89
DSP BlackRock Tax Saver Fund ELSS 27.59 26.87
ICICI Prudential Value Discovery Fund Equity 32.79 31.46
Kotal Select Focus Fund Equity 26.58 25.4
SBI Bluechip Fund Equity 24.73 23.64

Hassle of investing in Direct plans

If you are not buying through any broker or distributor, you will have to either buy mutual funds directly through fund’s website if they have online facility or from CAMs, MFU or someone similar. I buy direct funds through HDFC but I was too lazy to create similar accounts with other fund houses. I am sure it will not be very difficult to manage your accounts at various fund houses. There are some investment platforms that offer direct plans – but they charge for advisory service.

Tracking all in one place

If you buy direct funds through different websites, you will have to add your transactions manually to your portfolio. Other option is to use Cams or Karvy but I personally find it very painful to use.

Direct only funds

You might not have heard of any Mutual Fund that is sold only through Direct Plan. The primary reason is that there is no incentive for any distributor to sell direct funds (whose bread I eat, his song I sing – says a German proverb). But Quantum Mutual Fund has decided to go direct-only route to customers.

Summary

Direct funds are not for all. And similarly Regular funds are not the best for all investors. Expense ratio is not the only thing one should consider. Because there are even other way to save on that – you can directly buy stocks by following a mutual fund. Consider the following things before making the decision

– Actively investing or not
– Ease of purchasing
– Size of portfolio
– Kind of funds you are purchasing