What Are Direct Plan For Mutual Funds?

SEBI has mandated Mutual Fund Houses to come out with two varying options for all their schemes, namely Regular and Direct. The regular version of all mutual fund schemes will incur a charge which will be treated as an agent fee or commission and the direct plan is free from any charges. It thus eliminates the agent commission and will add to your profit and will make a good difference in the profit numbers in the long term. Direct plan mutual funds are grabbing the attention recently. So, what is Direct Plan and how does it make the difference in investing? Let’s understand how it can benefit investors.

Direct Option in Mutual Fund AMC

There will not be any mediator or the agent between you and the AMC. All such mutual fund schemes will come with the word “DIRECT” suffixed to them. These funds will have lower expense ratio when compared with the regular plans.

So, What Difference Does It Make To Investors?

Lower expense ratio in Direct Plan will help the investors to yield a better return in the long run. It is expected that the equity funds will have anything between 0.4% and 0.75% lesser expense ratio. HDFC Top 200 scheme has 1.19% as the expense ratio for its Direct Plan and 1.78% for its regular Plan. The difference in the expense ratio will help you to save the administration cost by at least 30% on your funds.

So, What Do You Gain?

Lesser expense ratio can be attractive when it helps the investors to yield better returns on their investments. Having a probable difference of over 0.5% in this amount, a long term investor who can make 5000 INR as monthly SIP investment over a period of 10, 20 years will see a sea of difference in his returns. For an investor who is interested in investing for just 2 to 4 years will not notice anything appealing.

Assuming the above said expense ratio for the Direct and Regular plan, an investor seeking 5000 INR as monthly SIP for 10, 20 and 30 years will yield the following returns (assuming 10% return)

Is it not grabbing your attention to immediately switch to the Direct Plan if you are a long term investor?

Who Should Choose Direct Plan?

Short Answer is Everyone should opt for Direct Plan only. Long answer is if you think you can find your own ways to identify the top performing mutual fund, Direct Plan is your cup of tea. You should be ready to shoulder the responsibility to carefully analyze the performance of your portfolio regularly as there is no financial planner or advisor involved in your transaction.

On the other hand, if you think your financial planner has been doing a very good job for you by eliminating the bad performing funds or helps you to increase your yield returns by 1 or 2%, you should still go with the advice of your planner as he/she will take care of your funds on a long term basis.

Should You Move to direct plan now?

Direct plans are beneficial for investors and so ideally you should be moving to direct Plans but if you have an ongoing SIP in any of the funds and if you switch plans you may incur exit load or short-term capital gain tax. Exit load and short term capital gain tax are applicable for investments less than a year old. The ideal thing will be to stop your current SIPs in the existing plan and start new SIPs in the direct plans and once your current investments are old enough (1 year+) to not attract any tax or load, move them to the direct plan as well.

More Queries

I am sure you will have lot more questions related to Mutual Funds Direct Plan Option and if you have any questions, ask them in comments below and I will be more than happy to help you.