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Concepts & Tutorials

Mutual Funds: Direct Plans Beat "Regular" Plans By 0.7% Per Year!

Mutual Funds have been in vogue as an investment class ever since their introduction in the 1960s with UTI introducing the first Mutual Fund in India. It has undergone a sea of changes and upgrades since those days, with public sector banks and other NBFCs throwing their hat in the ring as the years went by. The first private sector funds were set up in 1993, and this coincided with greater awareness among the general public about investing in Mutual Funds.

Currently, there are more than 40 AMCs in India that offer 1000+ MF schemes. Mutual Funds are currently offered in 2 forms – Direct Plan and the Regular Plan. This was based on how a customer invested in the Fund, either directly or through a distributor. This segregation, or rather the additional choice that the investor community was given, surfaced only in Jan 2013. Up until then, an investor would compulsorily have to approach a distributor in order to invest in a scheme, thereby indirectly paying commission fees to the distributor. However, SEBI brought in new regulations in September 2012 by way of which schemes would have to be made available to investors who wanted to bypass the middleman. As customers got more and more financially savvy and aware, the opportunity for the more technically sound ones to invest directly in a MF without the middleman sprang up in January 2013.

For obvious reasons, investing directly in a MF scheme would yield better results. Take away the middleman, and you now have one less person eating away at your share of profits. But investing in Direct Plans does come with its own caveats:

  • A lot more paperwork to be filled in before investing, which is taken care of by distributors.
  • Direct Plans require a substantial prior knowledge on MFs; distributors generally provide comparisons and a wide range of choices if you go through them.

Bottom-line: Way more research work and diligence is needed if one opts for Direct Plans. But how much reward does one get for choosing to do the dirty work oneself? That is what we look at below.

The AMFI website is a terrific place to obtain all sorts of data related to MFs, from AUMs to NAVs to monthly newsletters about the space and so on.

We picked out some of the top 10 funds based on AUM and list them out to see how much extra return can be obtained by going Direct.

MFs - Direct v Regular

On an average, these funds would have given you 1.5% extra, had you invested directly in them. These additional returns are over 2 years, starting January 2013 when the Fund houses made this approach available.

That is, effectively the return of a “Direct” plan is better by 0.7% per year. That is the “cost” of your distributor.

Note: Buying from a Bank, such as HDFC Bank, means you are using a distributor. Even if you buy an HDFC Mutual Fund, HDFC Bank acts as a distributor.  We know this is confusing, but that’s how it is. The only way to buy “Direct” is to have “Direct” in the fund scheme name – if the scheme doesn’t say “Direct” in your report, you are paying commissions.

The portfolios of both Direct and Regular plans are exactly the same. Yet, the Direct plan makes better returns, by 0.7% per year! 

For clarity: If one were to make an investment in let’s say, Reliance Growth Fund, the higher return of the Direct Plan would mean that for the same amount of capital, your return would be higher than the return you get if you invested in the Regular plan.

We have a more substantial list of 291 such schemes with the differential returns on a Google Spreadsheet which you can access.

In Part 2 of this post, we will show you how investing in direct plans make a difference, versus regular plans, and what you need to do to benefit.

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  • Haresh Nagpal says:

    AMC are allowed to have same portfolio for both help and no help funds.Only difference is due to distribution and upper side is protected to 2.5% of average AUM by SEBI .Out of this Investment and management fees is fungible now.I am not able to understand the difference .Are AMC doing something wrong to attract retail in there direct plans or maintaining different folio for direct and regular otherwise this sort of difference will not arrive .Please clarify in detail.

  • Haresh Nagpal says:

    There are funds whose funds are showing lot of difference between regular and direct plans.Can regular plan subscribers seek compensation from amc for flawing with sebi law or there can be reasons for such wide difference.

  • Yogi says:

    Is it my browser or did article finished just like that? Maybe I was expecting a conclusion.
    -Yogi

  • Arun says:

    Since direct plans were introduced in Jan 2013, the NAV the difference should reflect the compounded effects of 2 years worth of distribtor comissions. For example, assuming no retrurns at all, for a comission of 1%, the NAV difference ought to be 1.0 – 0.99*0.99 = 0.02 = 2 %. Thanks.

  • Umesh says:

    Investing MFs via Fundsindia.com fall under which plan? Just wondering.

    • FundsIndia is a distributor. They will give you the “regular” plans, not hte “Direct” plans.

    • Srinivas says:

      First there were distributors. They used to get commission from the amount we pay(a little of course). Then came platforms like funds india etc who were not taking from us but getting commissions from AMCs. The next step was this direct plans where one gets benefit of no commissions to middle men.

  • Sameer says:

    So it is just 0.7% that almost killed the entire mutual fund distribution Industry.Now people instead of investing mutual funds lost good amount in corporate FDs, specifically real estate companies.

  • Gold Bug says:

    Words of caution: When you buy any Direct Plan please mention Direct in both the funds name as well as in any other place in application form. I had bad experience with UTI MF where insiders are also brokers and are keen to prey on innocent victims. They will make sure you get regular plan and not direct. If you protest they will come with excuse ” you left the space empty”.

  • Gold Bug says:

    Words of caution: When you buy any Direct Plan please mention Direct in both the funds name as well as in any other place in application form. I had bad experience with UTI MF where insiders are also brokers and are keen to prey on innocent victims. They will make sure you get regular plan and not direct. If you protest they will come with excuse ” you left the space empty”. When you get the Account Statement you will notice name of your broker whom you have never known or met. If you dig deeper you may have a new friend who is a relative of the insider. You will get calender and diary promptly delivered to your address by MF staff for their Happy New Year.

  • chetan says:

    Can you also publish the avg difference for debt funds also ?

  • Sai Raghavendran says:

    Institutional investors were the first to jump on to the direct plans and the retail off take is quite slow. AMCs are not very keen to advertise direct plans (with the obvious exception of some like Quantum). There is not much additional work except maybe upfront, since you can do any transaction online. Do AMCs publish the expense ratios of both direct and regular plans?

    • Arun says:

      Yes, they do publish the expense ratios separately. Typically, every AMC will have a “Downloads” section where there will be a big file containing all expense ratios of all fund from them. You will have to search. Alternately, valueresearch or ndtv profit give the expense ratios for both plans, though they may not be current and lag by a quarter.

  • Nagendra says:

    I do know that Dividends in MF are not such a great thing as NAV gets reduced by the same amount, But IDFC Premier Equity seems to be paying 45% in case of the Regular Plan and 1.56% in case of Direct Plan
    Any thoughts about this difference in Dividend %

    • Don’t know why honestly. That’s why we only compare growth to growth, none of the dividend silliness will apply…

    • DJ says:

      Implicitly, you seem to be implying that dividends in equity work in a different way. But, its the same. Stock price would decrease by amount of dividend.
      Secondly, the dividends look the same to me:
      https://www.valueresearchonline.com/story/h2_storyView.asp?str=27266
      I think sometimes the dividend is quoted as percentage of face value at time of issue (NAV of 10) in which case it would be 45%, but really it should be considered as percentage of current NAV, which is closer to the 1.5% you have pointed out, so it may be a difference in quoting because it looks like the dividend is the same. I’m not sure, but this is my guess…

      • The concept of the dividend is it can only be on distributable surplus. So if a Rs. 10 goes to Rs. 12 then it’s likely the distributable surplus is only Rs. 2 per unit (fund accounting is complex but this is a good NAV rule of thumb). The div regular plans being older will have more distributable surplus – the direct plans will not. The direct plans actually started at the same NAV as the regular plans on Jan 1, 2013, so it’s not correct to use the rule of thumb with them to see the actual underlying distributable surplus…

        • DJ says:

          Yeah, I didn’t mean to suggest that divs cannot be different for the regular vs direct. But, in this specific case, the div is the same per unit (as reported in the valueresearchonline link) so I was trying to attribute the difference to quoting method, but apparently that isn’t the case either….

    • DJ says:

      Actually, even with current NAV, divvy would be close to 10% (not 1.5%), so the 1.5% does not seem right, despite quoting differences.

  • Ranga says:

    Just an FYI to everyone: CAMS recently launched mycams online gateway/portal. They support transactions on Direct plans also.
    Also FYI: their portal is currently in alpha . Expect improvements soon.

  • Prasanna says:

    Where is the part 2? I do not see a link…