Posted On Wednesday, May 28, 2014
Most of you would be aware of direct plans of mutual funds that allow investments to be made directly with fund houses, without an intermediary. Numbers show that direct plans seem to have delivered better returns for investors than their regular counterparts. Wonder why? Read on to know...
What are direct plans of mutual funds?
At the start of 2013 SEBI made it mandatory for all mutual fund schemes to have direct plans separate from the existing plans (also called regular plans).
The feature that differentiates direct plans from regular plans is lower expenses. This is quite significant because lower expenses of a mutual fund automatically translate to higher returns. NAVs of direct plan and regular plan of the same mutual fund scheme vary slightly and as many of you understand, returns are computed from NAVs. This variation could be attributed to lower expense ratio charged on direct plans since there are no distribution fees to be recovered from your investment in such plans.
Except for the expense ratio the portfolio, management and all other aspects of direct plan and regular plan remain identical.
Here we might add that being the first direct-to-investor mutual fund in India, direct plans weren’t new at Quantum; in fact they were the norm since inception for all our schemes!
Direct plan investments gave better returns
A quick analysis of the 5 largest and well performing equity funds shows that on average direct plans have given 0.91% more returns than what their regular counterparts have given in the 1 year period ending 5 May 2014. In fact the difference in returns of regular vs direct plans of the schemes we analyzed is more or less matches with the difference in their expense ratios.
|Difference in returns of direct vs regular plans||%|
|Compiled by Quantum AMC; computed from actual NAVs|
For some investors used to the regular plan of investing via distributors a difference of 0.9% might not look compelling enough to consider a chance in stance. However, think again. The actual difference in return in rupee terms could be too significant to ignore if the original investment is large. Plus longer the term of investment is intended to be wider would the difference in rupee terms be owing to the effect of compounding.
Over a period of 15 years a 0.91% difference in expense ratio can leave your portfolio with approximately an additional Rs 87,000 on an investment of Rs 1 lakh! The illustrative table in one of our previous QED articles on the effect of expense ratio on your mutual fund investments demonstrates this very well.
How direct plans fared with investors
By the end of 6 months of their launch direct plans were contributing 25% of mutual funds’ Assets Under Management according to a Crisil research report (Crisil Insights, Capital Markets Research, 29 Jul 2013).
The report also noted that it is mainly liquid fund investors, which constitute mostly of corporates and HNIs, who seem to have taken direct investments serious. Equity investors who are mostly retail investors do not seem to have made the switch yet.
What could the reason for dull participation in direct plans from retail investors be? To us it seems lack of proper awareness about the existence of direct plans and the benefit they could provide. Add to this the fact that most financial advisors that investors rely on for guidance in selecting funds also double up as mutual fund distributors!
Going direct with your mutual fund investment
With benefits loaded in favour of direct plans and more so in case of investments for the long term, investors can actively make their lumpsum as well as SIP investments through the direct mode and reap benefits.
At Quantum all schemes have just one plan, the direct plan, as we are a direct-to-investor fund house. And since Quantum follows the Zero Commission policy those investments in Quantum schemes channelized through distributors qualify as direct plans too.
As for other fund houses investors need to follow certain procedures for making investments in direct plans. Existing investments can be switched to direct plans too using few procedures.
We strongly encourage investors to consult a financial advisor before making investment decisions, preferably one who does not distribute mutual funds only for commission. This preference would keep possible conflicts of interest at bay, besides leaving the option of direct mutual fund investment open to you.
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