SEBI has mandated Mutual Fund Houses to come out with two varying options for all their schemes, namely Standard and Direct. The standard 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.
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)
| Regular Plan | Direct Plan | |
| 10 Years | 9,40,969 | 10,55,096 |
| 20 Years | 29,80,366 | 34,82,980 |
| 30 Years | 74,00,422 | 90,69,788 |
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.
Hi sir,
I have some doubts.
a) I know that returns of MF are again invested in the sam MF.But if there is increment in NAV then why should we not sell. Eg:I buy 100 units of NAV 20 and after few months Nav is 50. Why should I not sell them at NAV 50.Because there may be chances that it may never touch 50 in upcoming years?
b) Also How is the return on MF calculated as the price of the stocks changes every sec and so does the NAV of the MF. So will the return be updated and added every second to our bought MF.
I am new to the investment field, Help will be appreciated.
Atul, the NAV of mutual funds rise because professional fund manager invest in the future growth stocks. It has never happened that NAV touches one level and never gets to that level. All the time it will rise but then quantum of rise in good funds is always more than in average funds.
NAV is calculated at the end of the day price and yes it may fluctuate on a second to second basis but it is not reported nor traded.
Hope it helps.
ohh, so selling long term will help because whatever returns we get will be again used to make more profit.
Should I make portfolio like have 3 MFs having one large,one mid and one small cap. Like which factors I should consider and which sites will be helpful to analyze MFs .
Thanks for the help.
Atul, selling and investing back again to more profit does mean you pay exit loads and tax and instead you can remain invested.
For number of SIPs please read https://shabbir.in/how-many-sips/
How much time should I keep small or medium cap MFs if my main motive is to get fast returns.. I have also read that if we sell MFs in less than a year then returns will be taxable
As long as you don’t need the funds or if you are sure that market is about to crash. I don’t see a reason to book profits otherwise.
Yes any equity investment under 1 year is taxable.
Sir which site is best , fundsindia or scipbox , or mysiponline . also i am looking for non tax SIP, so which Mutual Fund i should take
I have used FundsIndia and they are really good but have no experience with others.
For non tax saving funds, if you are an aggressive investor you should invest more in small and midcap fund and less in large cap fund and if you are a defensive investor you should invest more in large cap fund. I prefer to avoid suggesting fund and prefer how you can do it on your own. Search for the best performing funds on ValueResearchOnline.com and then invest in those that invest in sectors that you think will outperform more over others.
sir, I would like to know that, how do I invest in mutual funds directly without folio no. and how to create folio no. to invest in mutual funds directly.
You can directly visit the official site of the mutual fund and invest directly from that site. If you wish to do things offline, visit the office of the fund house and invest there. Remember HDFC Mutual fund office is not same as HDFC Bank Branch.
hi, for certail funds I see the expense ratio same for direct and regular plan for eg: icici focused bluechip fund growth and axis long term equity fund growth. For such funds there won’t be extra chanrges except the brokerage? Pls correct me if I am wrong.
But the brokerage can be quite a bit when you add up on SIP. Just make sure you are aware of them Gaurav.
Hi shabbir nice article by you. I have invested in some of the MF via sharekhan online. After reading your article, I am thinking to switch my investments to direct plan. Now all the funds are more than 1 year old with sharekhan.
So please let me know if it is advisable to switch and what will be charges for switching.
Thanks in advance.
No switching would not be good choice but if you have SIP option, then opt for stopping the SIP from Sharekhan and start a direct SIP. Keep the sharekhan investment as it is and do not invest further would be better option.
Dear Shabbir:
Read your article and it is very nice and an eye-opener to MF Investors.
Good work. Keep it up.
Thanks & Regards.
S. Sridharan
Madipakkam, Chennai-600091
Glad you liked it S.Sridharan
Very good information.
I normally purchase through selected funds through ICICDIRECT on SIP method. Only advantage now I see is you can invest on several funds on SIP manner under one roof and follow-up is easy. For direct investment I think you have to register your name separately on each fund manager’s websites and follow-up will be difficult.
Thanks
But the returns after a period is good enough for the pain.
hi,
I want to know expense ratios of following funds(direct plans), except hdfc i cant find it for other AMCs
1. franklin india bluechip
2. Quantum long term equity (i think its already a direct plan so no change in expense raito?) – 1.25
3. hdfc top 200 – 1.19
4. DSPBR mid cap and small cap
5. hdfc prudence
6. hdfc equity
7. templeton india equity income
Ajinkya, ValueResearchOnline has expense ratio of all the funds listed.
the info has not been updated on VRO
Thank you for your post, I have a few questions.
A) I buy my mutual funds via sharekhan and I don’t find any direct funds there
Are the direct funds available only with the direct AMCs?
B) in a sip based mutual fund, is the age of the mutual fund calculated based on the date of the last sip installment ?
A) You don’t expect Direct plans under the brokers and they should be by AMC’s direct only.
B) Yes that is what I think and remember.