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Personal Finance

Long Term Returns for Going "Direct" Can Give You Many Lakhs More

Last week, we wrote about how investing in Direct Plans vs Regular Plans could give an investor up to 0.7% extra returns annually. The differential is because of commissions that the distribtors get versus none in the Direct route. 

Take the HDFC Equity Mutual Fund, for instance. The Fund was started on January 01, 1995 with a starting NAV was Rs. 10. The Direct Plan was introduced in January 2013.

This is how the NAVs of both the Plans of the Fund have grown since Jan 01, 2013:

NAVs - Reg vs Direct

On January 01, 2013, the NAV of the Regular Plan (the only one existing at that time) was Rs. 296.88. The Direct Plan was then introduced. Now, if investors chose to, they could enter into either Direct or Regular Plans at the same price. As of March 05 this year, the NAV of the Direct Plan (Rs. 494.84) is Rs. 7.45 above that of the Regular Plan (Rs. 487.39).

The regular plan has a higher Expense Ratio. (2.18% for the Regular, and 1.50% for the Direct Plan).

Direct Plans Can Make 10% Greater Returns Over The Longer-Term

If we invested Rs. 1,00,000 in the same fund right now, then how would the Direct plan fare versus the Regular plan? For simplicity, instead of the CAGR of 21.23% (which is quite high), let us assume a return of 12% for the Regular plan investors, and 12.7% for those who went Direct.

NAVs - Reg vs Direct-02

Rs. 1 lakh invested in the Regular Plan gives you Rs. 9.64 lakh after 20 years.

The same investment yields Rs. 10.93 lakh if invested in the Direct Plan; 13.3% higher!

This calculation was only for a one-time investment. With a Systematic Investment Plan (SIP) of Rs. 5,000 each month, at the end of 20 years, you would have Rs. 49.96 lakh in a Regular Plan and Rs. 54.96 lakh in the Direct Plan. That is also 10% extra! 

More importantly, it’s Rs. 500,000 extra – and who doesn’t want an extra Rs. 500,000?

How Can We Invest Directly?

Investing Directly is simply about buying from the Fund directly. Either on the Mutual Fund’s web site, or by giving them paper forms. Remember, buying on HDFC Bank’s Web Site doesn’t mean you buy Direct from HDFC Mutual Fund – you have to buy it from HDFC Mutual Fund’s web site directly. If you buy from intermediaries like Funds India, Scripbox or Aditya Birla MyUniverse, you’re not buying Direct.

The most common way is to transact online: Most mutual funds now allow you to create a folio online with your information.

Sometimes the easiest way is to have a small transaction through a distributor, which then creates a “folio” with the mutual fund. Then, you can use this Folio to make further transactions on the mutual fund website, duly authenticated.

Regardless of the method of choice, enjoying those extra returns will be made possible only by the due diligence of the customer. There have been many instances where different funds have made opposing returns despite following similar strategies. The risk levels for schemes can also vary. HDFC Equity Fund for instance, currently has 97.95% of their assets invested in equities, the riskiest of asset classes. Differentiating among the various Fund Schemes based on their risk-reward ratios, their investment strategy (growth/value stocks, large/mid/small cap stocks) etc., is a job that erstwhile was left to distributors.

However most online websites now make it easy for an investor to sift through all that data and easily find the best mutual funds to invest in. Most intermediaries do no real work beyond the first year, but they earn commissions out of your investments forever. At a tiny percentage, this would be okay (say 0.1%). But when you see that you lose by 0.7% a year, you wonder if it’s worth all the lack of advice, which you could pay for like you pay a doctor. 

What investors don’t really know is that you can get a far better return going Direct. Distributors don’t want to tell you. Advisors should (since they charge for the advice) but they want that back-end commission to spruce up their books, so they usually don’t either. Fund houses would like to, but don’t want to tick off their distributors by advertising that as the best option. 

It’s going to be left to investors to find it. In an increasingly savvy India, it will not be long before Direct plans take over as investors’ default choice of investing. Take the 0.7%.

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  • Srinivas says:

    Going direct needs one time investment of time, for visiting the fund house. I had this experience with ICICI and HDFC AMC.
    However, after that it is a cake walk.
    But if one wants to invest in 5 different funds from 5 fund houses, one needs to visit all of the AMC offices and open an account.
    Still I feel, the effort is worth it.

    • Nitin says:

      Each of the mutual fund has their own website. If you already have a folio, then you can register there and there is no need to visit them ever again. Even better in the CAMS website (and their Android App) that allow to invest in direct schemes of all the major MF houses (ICICI, FRANKLIN,HDFC,TATA)

  • Anshuk Jain says:

    Sometimes the easiest way is to have a small transaction through a distributor, which then creates a “folio” with the mutual fund. Then, you can use this Folio to make further transactions on the mutual fund website, duly authenticated.
    Isn’t this unethical? I did it once and felt bad..

  • abhishek says:

    If you have MF investment already, create a profile on CAMS (mycams to be precise) and Do whatever transaction one want to do. Offcourse this applies to only funds where RTA is CAMS

  • Anand Gadiyar says:

    Why the small transaction with a distributor? It’s not too hard to go to a CAMS or Karvy office and do the initial transaction. Even in small towns, this is not too hard to do, no?

  • Harsh Gupta says:

    Going direct is very easy- just visit a registry like CAMS or Karvy to do the initial transaction. These offices process transactions for multiple fund houses. All it takes is 10 minutes to build up a mutual fund portfolio.

  • Ranga says:

    Nice article. Thanks for sharing this to wider audience.
    Does similar difference happen in Regular vs Direct Plans for Debt , Liquid, ELSS etc funds also ?

  • Ankur says:

    Do you know how to switch existing regular plans ‘SIPs’ (made through agent) into direct ones? Will AMC ask us to close the running SIP and open the fresh one in the same folio? Is that the only way?

  • anand0388 says:

    The only problem that I see is Banks are not promoting this, if you don’t know about the direct plan they will not even tell you the option of direct plan. You can visit any of the nearby branch in a bank to open a mutual fund SIP in regular plan but for direct plan you got to visit the bank AMC. You only have one AMC office for any bank in the city.Now if you are a small investor and want to start a SIP for Rs 1000/- for a year it hardly makes a difference of hundred rupee approximately, but will avoid the pain of finding the AMC and traveling so far to open your SIP in direct plan.

  • RK says:

    Hi Deepak/Gautam,
    I have demant account in ICICI. If i buy mutual funds via my demant account, does it amounts to Regular or Direct?
    Please advice.
    Regards,
    RK

  • anand0388 says:

    I opted for SIP in HDFC MF SIP in three funds and went directly to HDFC bank and asked I want to open it in direct plan and he suggested you need to visit the AMC. It pissed me off but I took the regular plan avoiding wasting another day and the inconvenience to travel to the AMC. Its like the HDFC bank itself does not want to promote their own product, if you have the option provide it to your customer. I expect better commitment from the private bank on this part.

  • rajnish says:

    MF utility launched recently will eventually have DIRECT option for all(most) the MF houses online ? Also SIP via DIRECT ?

  • If I am not wrong, this pecularity (Direct Plans Vs Regular Plans) is there only in India, it is not present anywhere else in the world. Or is it?
    Why then was it thought to be necessary in India? There are distributors elsewhere too.

    • Well, enforced no-loads are also not a worldwide feature 🙂
      Direct is a great idea, and in the west it’s done through ETFs (which by definition have no commissions built in).

    • Ram says:

      Other countries have different series of the fund…Series A, D, F, etc…each series has their own expense ratios and some series are only available through specific channels.

    • M jadhav says:

      In west, especially in UK, there was heavy commission (almost 5%) upfront plus other ongoing charges ( a lot of trail commission) for Funds (They call it OEIC) if you buy this through IFA or Advisors. This was banned few days ago with RDR (Retail Distribution Review).
      But a lot of companies came up with idea that we will save your 5% + we will give you back your trail commission in form of units but will retain small portion of it for us kind of. ( h-l.co.uk, cavendish online, fidelity fund-supermarket etc.)
      Due to RDR, now they are not making any money out of trail commission, but they started charging percentage of portfolio annually now ( ranges from 0.25 to 0.45% or even more). Also in West, to check your identity as part of AML (Anti Money Laundering) laws, it costs a lot of money to get it certified your ID documents if that companies office is not in your town or city, which makes a whole process more cumber-sum.
      In India, I used to go to CAMS or KARVY or FT office which were centrally located in Secunderabad to do direct transaction, which was much easier than in UK. In bigger cities like Mumbai or Delhi, going to these offices might be a problem but this just one time thing, after that everything can be done online.
      Sending application + cheque + photocopies of KYC acknowledgement by normal Post within India, is also a time saving option if you are not much bothered about NAV of the particular day which will cost not more than Rs 5. (very old cost to send a envelop weighing less than 10 gm or so, not up to date with latest rates).

  • Shashi says:

    Deepak, I found a link for https://www.mfuonline.com from website of AMFI which I understand is a platform from which one can invest in Direct scheme of any fund in India (not restricted where RTA is Karvy, CAMS, others). The website looks very naive (in fact fake) though, not a professionally designed one. There are no marks of authenticity, address, contact, about on the home page. Do you have any idea/experience of anyone using it?

    • Shashi says:

      More information about this is available here: http://www.mfuindia.com/MFUtility

    • Rohita says:

      Shashi – this is a genuine company. Under contact there are details of their phone numbers, call centre number, address, etc. You apply to open a Common Account Number (CAN) with them and you can very conveniently transact using MFU forms. It is very easy. No need to fill up multiple forms when you use MFU forms and you can transact in multiple schemes of multiple AMCs in a single form. I recently opened a CAN and have transacted too. It is very useful. I am told by MFU that in about 5-6 months they will also provide a log in id for the CANs and investor can directly transact through their website, including in direct plans of Mutual Funds. Single place to log in and transact. I am looking forward to it. You also open a CAN and see the benefit.

  • S.K says:

    Most fund houses have now automated the process of initial ‘direct’ investing in their mutual funds on line without the need for paper application, cheque etc. Only prerequisite is that the investor must be KYC-compliant. Even if you are not KYC-compliant yet, many fund houses send their representative to collect documents from you to get the KYC and investment done in one go.
    Once the initial process is over you can log-in the fund house’s portal and do all kinds of transactions. It is a cakewalk.
    Happy investing!
    S.K

  • DJ says:

    What is the deal with this entity called CAMS? Why does it exist, who owns it, etc?
    I always am apprehensive of dealing with Karvy and CAMS. I went to one of their offices once and it seems like any random person will get information about my folio/PAN/phone/DOB etc and can look up my portfolio, etc. So I have avoided going to them so far. Should we have a security concern with CAMS or are they ok, and the concerns are unwarranted?
    I don’t understand why they exist anyway. And, why the end user has to deal with some back office thing like folios, etc. And, why it takes onerous paper processes to link email and phone number to folio and other mundane stuff. And, why I have to do it via CAMS rather than the AMC.

    • CAMS is owned by HDFC I think. It’s a registrar. No security concern, they actually hold your registration with the MF and have your details (the MF provides it to them and they maintain the records)
      Yes, the process is unnecessarily complex…

      • DJ says:

        So, why does a registrar need to be involved in anything except registration (the need for which I don’t understand but lets leave that aside for the time being..) and that too should be in the background, no? Why should it have offices, products, platforms for trading, portfolio management, etc? Complexity is one thing, but first and foremost it is bad architecture from a security point of view. Because all these public interfaces can be easily compromised. Also, a registrar should have minimal staff to prevent possibilities of ID theft. It should all be in the background. Anyway, there are too many other immediate problems for this to be on anyone’s radar.

  • K.Sundaram says:

    Well written article that I found to be very useful. By common sense I could guess that bank account interfaces to MF’s won’t enable purchase of direct plan instruments – although they could if they wanted to build favourable customer relationships. I could verify that point by visiting this blog post.

  • Anand Vaidya says:

    Hi Deepak,
    I found your website after watching your excellent Youtube videos. Thanks a lot!
    As a new investor into the MF/stocks world of India, I have an account with FundsIndia. There are a few comments I’d like to make after my experience with them:
    1) FundsIndia declares the commissions they get from AMC’s on their website. There is full disclosure and not hidden from customers
    2) Their customer service is worth paying, even if indirectly from AMC, (especially for people like me who come from abroad and get a rude shock here in India with KYC and what not.) They have gotten me started smoothly with MF/stocks, I acknowledge.
    3) Recently, I had questions about “direct” funds and they seem to be cool with it. (I assumed they’d turn fussy, but they didnot)
    So, my conclusion is it is not a bad idea for newcomers to work with some good companies like FundsIndia that provide great customer service. I will be happier if they charge us a fee and provide the customer support etc….

    • Of course. Pay if you see value!
      The important thing is to know what you’re paying, and if you’re okay with paying it, you should. Companies like FundsIndia do very well to serve customers well, unlike many mutual fund agents and bankers. You should definitely consider using their services, and if you find them good enough, pay them (although indirectly).
      (Disclosure of commissions, btw, is mandatory and every bank/distributor is required to tell you what they make. FundsIndia though discloses even more than they are required to, kudos to them.)

  • Rohita says:

    MF Utility (www.mfuindia.com) is a very authentic and wonderful system for distributors and investors to deal with. This is launched by AMCs as its shareholders. They allow you to open a Common Account Number (CAN) through which we can invest in any of the top 25 AMCs. I have opened a CAN and now the transaction is so easy. Also when I use MFU form available at http://www.mfuindia.com/forms I can invest in many schemes of any AMC through a single form and a single cheque. Also when I have to redeem from five schemes of different AMCs, I need to fill up only one form and submit. It is very very easy. I hope all the investors start using MFU like I am doing and benefiting.