Its being 8 months now when Direct Plan in mutual funds investment came into being. The rationale for such option was that investors who does not avail services of an agent should be benefited. Many investors have moved to this option, especially the corporates and slowly individual investors are finding the option lucrative. A direct plan in mutual funds gives an opportunity to accumulate additional corpus in respect to the charges which has been waived.
Let’s discuss about this option and why it is beneficial to mutual fund investors-
What is a Direct Plan?
Initially, for investing in mutual funds, investors has to avail services of agents or distributors. Even individuals who would like to do it themselves had no option but go through this route. There was entry load charged from investors account for these intermediary commissions. This was considered as unfair for such investors and so SEBI waived this for investing directly through Mutual Fund companies. This brought a large difference among investors availing services of agents and one which do not. But then also the entry load was considered to be too high and so SEBI abolished it completely which actually did good but negated the difference between these two category of investors. To provide benefit to investors not requiring intermediary services , direct plan was introduced from January 2013. Under this option the annual charges which companies deduct for various expenses is lower by almost .5-1.%. Due to this difference the NAV of direct plan is constructed differently. Now every mutual funds scheme carry two NAVs – one for investing through intermediary and one for direct Plan. Since there is a difference in expenses the end returns for investors also varies between these two options.
How it is beneficial?
After abolition of entry loads, most of the charges in mutual funds are annually deductible. Since these are recurring in nature, they impact the net returns one generate from investing in mutual funds. The expenses in direct plan are lower by .5-1% and so one can expect the boost up in returns by the same amount. So a return in direct plan may work out to 11% as compared to 10.5% in a regular plan. When invested for long term this variation can make a good difference in corpus accumulated. For e.g. if you are investing Rs 10000 p.m. for 10 years, then a difference of .5% in return will accumulate approx Rs 50000 more while a difference of Rs 1% will accumulate approx Rs 1-1.2 lakh more. For smaller investors this is a good benefit which will accrue for their goals.
Who Should invest?
If you are not taking services of any agent/ distributor, the selection of right scheme rely heavily on your self awareness and expertise. The investment can go for a toss if you are not well versed with doing even a basic research on mutual funds. So take a consultation before opting for a direct plan.But even for individuals who do not hesitate to pay a fees to good advisors the option is surely beneficial. For investors who have the level of expertise required for selecting a mutual fund scheme w.r.t. their requirement and can monitor their portfolio, the option is highly lucrative for the additional returns which they will make.