Every mutual fund comes in two versions – direct version and regular version. The only difference between them is that regular mutual funds have a distribution commission while direct mutual funds do not.
But, is that the only difference? And does that really matter to an investor? Yes, it does. In order to elaborate on that short answer, let’s take a look at how direct plans are better than regular mutual fund plans.
Reasons Why Direct Mutual Funds are Better
#1. Higher Returns
The returns of any direct mutual fund are always higher than the regular version of the same mutual fund.
One of the key factors which influence a mutual fund investment decision is the return. The return of a mutual fund is usually calculated on 1 year, 3 years, and 5 years basis to represent the traditional investment horizon.
The returns in case of direct mutual funds are always higher than their regular counterparts.
Here are a few examples.
|1 Year Returns (Regular)||1 Year Returns (Plan)|
|Aditya Birla SL Tax Relief 96||21.27%||22.90%|
|Sundaram SMILE Fund||17.05%||17.95%|
|Motilal Oswal Multicap 35||15.50%||16.98%|
#2: Low Expense Ratio
The expense ratio (fees charged by the mutual fund company) is much lower in direct mutual funds.
Most people, when investing in mutual funds, tend to take the help of their preferred mutual fund advisor or from their local financial service advisory.
As such, a friendly advisor can help fill that gap. But, did you know that the fee paid to the advisor comes out of your pocket? In fact, that fee is deducted straight from your investment amount and paid to the advisor or agent.
This fee is deducted as a percentage of your investment by the mutual fund house and generally varies between the range of 0.5% to 1%.
When investing in a direct fund, no commission fees or distribution charges can be deducted by the AMC (as deemed by SEBI). The expense ratio is much lower as the mutual funds are not paying any commision to the brokers. It saves a general investor a ton of money over their investment horizon.
For example, look at this comparison between the returns of SBI Bluechip Fund (regular plan) and SBI Bluechip Fund (direct plan.)
|Initial investment amount||₹ 10,00,000||₹ 10,00,000||0|
|Investment tenure||5 years||5 years||0|
|Avg. 5 Year Return||20.34 %||19.24 %||1.1 %|
|Final return amount||₹ 25,23,771.53||₹ 24,10,515||₹ 1,13,256.53|
#3. Higher NAV
The NAV of any direct mutual fund is always higher than the regular version of the same mutual fund.
NAV is an abbreviated form of the term Net Asset Value.
It represents the value of a mutual fund and is determined by calculating the total assets owned by the fund and dividing it by the number of units outstanding.
The assets owned by the fund generally vary between debt instruments like debentures and bonds and equity instruments like company shares.
In some cases, cash might also be a part of the assets owned. The total tally of these instruments is calculated to arrive at the assets owned by the fund.
Read More: 13 Things to Know About NAV
If the fees paid to the agents can be avoided, then the amounting NAV is higher.
As a result, direct funds have a higher NAV than regular funds of the same mutual fund. As a result, your total investment value is higher in a direct fund. Let’s take the help of an example to understand exactly how this might affect you:
|NAV (Regular)||NAV (Plan)|
|Reliance Large Cap Fund||₹32.1887||₹33.7213|
|HDFC Small Cap Fund||₹46.954||₹49.539|
|L&T Short Term Income Fund||₹18.7264||₹19.026|
#4. Fewer Chances of Being Misled
No hidden charges, vested interests, or ulterior motives.
While retail investors might think that having an advisor by their side will be helpful for their investment, they are only partially correct.
A look at the consumer forum will tell you that there is an umpteen number of complaints filed against wealth advisory agents who duped investors and stole millions.
While not all agents are fraudulent, the mere fact that their compensation is on a commission basis and depends on your investment amount brings about a conflict of interest.
With direct funds, the chances of such activity are next to none.
For retired professionals, it can save them ample heartburn. If you do need guidance regarding which funds you want to invest in, there are credible sites online which offer investment in only direct funds.
While some charge a small one-time registration fee, others provide the service free of cost.
#5. You’re in Control
You’re fully in control of your mutual fund investments.
One of the issues with agents and brokers is that since an investor’s all needs are met by a single person, they seldom look to engage with the AMC directly.
As a consequence, when the agent changes agency or just moves to a different city or even takes up a different profession, you’re left to deal with everything yourself.
Since you never had the complete understanding of the inner workings of the process at AMCs, even updating your KYC might seem like an uphill task.
This is especially compounded by the fact that most AMCs refer to the responsible agent when investors seek to consult them directly. However, this is only applicable to regular mutual funds.
In case of direct funds, you are in fact, encouraged to interact and consult with the AMC directly.
As such, it educates you with regards to the procedural mechanisms and even negates the dependency that an agent creates. All in all, it makes you a better and more responsible investor.
Direct Mutual Fund History
A mutual fund can be of two types – direct and regular. A regular mutual fund is generally invested in through a brokerage house, mutual fund advisor, or agent. While in a direct mutual fund, you can invest in the mutual fund house directly.
Prior to 2013, mutual funds had to be bought via distributors, agents, or advisors since it was thought that the general public lacked the awareness.
However, such funds carried a charge, where a certain percentage of the amount would be paid by the mutual fund house to the brokerage firm as commission.
Prior to 2009, this was known as ‘entry load’ but was subsequently banned as SEBI (Securities Exchange Board of India) did not want asset management companies (AMC) to charge investors for distributor feeds.
However, it was later renamed and deducted under a different name. In 2013, SEBI passed a new regulation, which required AMCs to provide direct mutual fund access to the general public, so that they could invest without being charged for the commission. As such, this came to be known as Direct Funds.
Direct funds are generally just a different version of the regular mutual funds. The only difference is that the traditional agent/broker is not involved.
As seen above, this simple exclusion has a multi-layer impact on your NAV, return on investment, and general relationship with the AMC.
So, the next time you’re thinking of investing in mutual funds, take up a direct fund. It might involve some preliminary work, but it will bear great dividends in the long-term and save you a lot of potential headaches.
While the general populace might be content with commission-based agents shouldering their investments, it might be helpful to take a more active approach to your long-term financial goals. Learn a bit about the AMC you want to invest in and compare their funds or take up the services offered by wealth management sites like Groww that help you build your own portfolio or invest in a pre-made portfolio based on your needs.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.