Direct Mutual Fund Plans: A Low-Cost Option of Investing in Mutual Funds

Excerpt: Investing in direct mutual fund plans lowers cost and provides higher returns to investors compared to the regular plans

Middle-men, brokers, agents or the more euphemistic intermediaries and distributors, however they are called, are the go-betweens in a transaction who take away a large chunk of the money as the product makes its way from the producer to the user.

Some of them are mandated by regulations — you can’t buy securities without brokers — in some cases they form a vital conduit whereby producers can sell their goods to customers, but there are products and services which would be all the better if there were no intermediation between those who make them and those who use them. Commissions and brokerages charged by the intermediaries inflate the price of the products and services for consumers.

Millennials or Generation Y people probably would not remember this but there was a time when the Public Provident Fund actually used to be sold through agents who got commissions for it. Investors need to realise that when there is a choice it is better to buy a product directly from the manufacturer because that reduces your expenses and increases returns.

In 2013, in a bid to reduce the cost of investing in mutual funds, the Securities and Exchange Board of India directed mutual funds to offer customers the choice of investing directly in mutual fund schemes or going through a distributor. So now there are two distinct types of mutual fund schemes — the direct plans, where investors can invest directly in the schemes offered by fund houses and there are regular plans where the investor invests via an intermediary which can be a bank, a broker or an individual agent.

What are Direct Mutual Fund Plans?

When you do your monthly shopping you usually go to a local store or a supermarket to purchase all your provisions. Now how about if you went directly to a Hindustan Unilever factory or office and tried to buy soap or toothpaste from them? Or tried to buy salt from Tata directly? I don’t think you would be able to get it. However in the case of mutual funds, if you went to one of their investor service centres, you would be able to directly buy (or invest) in their schemes.

In order to make it even more convenient, you can make the purchases online directly from the website of the respective AMCs. Online purchases of direct plans of mutual fund schemes are also available with mutual funds’ registrar and transfer agents such as CAMS and Karvy.

What are the advantages of investing in direct mutual funds?

From all the foregoing, you will have realised that investing directly in a mutual fund translates to lower costs for you. What does that mean? Every fund house has expenses in the form of asset management fees, administrative fees, broker commissions etc. and all of these expenses are taken out of the amount that you invest. A big chunk of it is due to broker commissions. For instance, if the regular plan of a mutual fund scheme has an expense ratio (the total expenses as a percentage of its total assets) of 2.5 percent, the expense ratio of the direct plan would be less than 1 percent. Therefore your returns will be higher to that extent in terms of the lower costs that you are paying.

Net asset values of direct plans are higher than the net asset values of regular plans, because of the lower cost associated with the latter. You can visit the website of any mutual fund and compare the mutual fund scheme NAVs of direct plans and the regular plans. You can easily spot the difference.

FinZipp is a platform that allows investors to make investments in direct mutual fund plans and so avoid paying all the costly brokerage fees that make a dent in your returns. You get expert advice on the website at cost-effective rates so that puts you in control of your personal finance decision-making.

Without going into tedious calculations (more on that another time) let us state here that investing in direct mutual fund plans results in additional returns of anything between 0.5 to 1 percent annually, compared to investments in regular plans. While that may seem like a small amount to you when you look at it in a year, when it is over a long period of time, say 10 and 20 years, it adds up to a substantial amount.

By Amit kaushik