Ideally, mutual funds come in two categories direct and regular selling of funds as per the Securities and Exchange Board of India (SEBI), and one can buy the former directly from an asset management company. In contrast, one can buy the latter intermediary.
Before knowing why to invest in direct funds, one must know about what is a direct mutual fund.
Things to know about direct mutual funds.
Ideally, direct mutual funds are the ones that are directly purchased from some asset management company (AMC), and they are known as immediate plans. There are different types of direct mutual funds here.
- Open-ended funds except for those that are likely to be closed or withdrawn and ETFs.
- Capital Protection Oriented Schemes or new Fund Offers (NFO), both open-ended and close-ended.
The agents, brokers, or other intermediaries don’t play any role under the direct mutual funds. The one investing here is likely to be free from commission or distribution fees, which brings down the expense ratio.
The only difference is that they are likely to have a different Net Asset Value (NAV), and the prospectus is expected to mention Direct’ to help investors identify direct plans.
Regular v/s direct funds
The sales commission is paid to intermediaries or brokers who get business under the regular funds, and the amount of commission varies between 1% to 1.25% a year.
Additionally, one must know that their monthly statement doesn’t reflect a similar amount, as their mutual fund units NAV or net asset value is likely to be adjusted accordingly.
On the flip side, AMCs are not likely to pay any sales commission, so annual returns are most likely to be at least 1% to 1.25% more in the case of a direct plan.
Still, an intermediary understands one’s investment profile and risk appetite and guides them accordingly. Additionally, a certified financial expert can save people from investing plenty of time and picking the best plan to suit their requirements.
Lastly, many investors are encouraged to make the most of their financial decisions on their own, thanks to the rise in financial awareness and easy access to the market.
Additionally, the growth of online investment platforms and technological advancements is likely to allow investors like you to buy, sell, and get other mutual fund services with no or minimal need for human intervention.
The direct plan was launched on 1st January 2013 for all new and existing mutual fund schemes considering the mutual interest of several investors.
Reasons to invest in direct funds
Lower expense ratios
Ideally, the proportion of MF’s daily net assets used for meeting their annual operating expenses is known as expense ratio, and costs are most likely to include commissions and administration to the agents and distributors.
The operational costs of direct plans are likely to be way lower as fund houses do not require paying any commission to the distributors selling immediate plans.
The low expense ratio of the direct funds tends to lead to higher returns as savings in distribution expenses are likely to remain invested in immediate plans and generate returns on their own due to the compounding effect.
Higher net asset value
Thanks to the higher returns, NAV of direct plans is higher than their regular counterpart as the operating expenses of the fund is likely to be reduced from its net AUM, and of course, the lower expense ratio of the direct plan tends to lead to higher NAVs.
Therefore, when the compounding power comes into effect, the difference in NAV tends to get wider.
One needs to know that Mutual Fund Distributor commissions grew by 70%, and the ones who sold people MF scheme earned more than they did on their funds!
When one chooses to invest in a Regular Plan of a Mutual Fund scheme, a big chunk is regularly cut away from their gross returns in the form of commission every year to intermediaries, including distributors, agents, or brokers who sold them the plan.
The best part is that people can prevent this leakage in no time by investing in a Direct plan as they need only to pay a one-time fee, and there are no recurring or hidden costs.
One must know that regular plans lead to a lot of mis-selling, i.e., an intermediary persuading you to buy a scheme that would earn them a lot of commission somewhat instead of the one that would result in the highest returns you. Well, personal bias cannot be avoided under a regular plan.
Still, it can be avoided under the direct plan as one can avail a transparent advisory for recommending funds that match one’s financial goals, investment horizon, and risk tolerance.
If one is about to invest almost all the direct plans with each fund house differently, it would be challenging to remember all the passwords and names. But, simultaneously, one can convert it to a straightforward procedure and manage all of it under one roof.
Hence when returns in the market are low, direct plans tend to work way better and significantly impact, so investors don’t need to stress much.