Mutual Funds – DIRECT v/s Regular plans

Source: ET,Valueresearch,Business Standard

Direct plans of mutual fund schemes have made better gains for investors than their regular schemes have offered. Investor interest in direct plans offered by mutual funds, guided by better ratings from agencies, is on the rise. It is a known fact that direct plans generate better returns because of their lower expense ratio, and since rating agencies use risk-return analysis to grade schemes, direct plans, by default, get a better rating. If you scan through any of the rating and research agencies' websites-Morningstar or Value Research, for instance-you will find that direct plans of most schemes have a better rating.


When an investor approaches a fund house directly at any branch, without an intermediary, this is categorized as DIRECT investment. SEBI Registered Investment Advisers also advise their clients to invest under the DIRECT plans.

As there is no component of distributor commission, these tend to offer relatively more return to investors.

Though direct plans are cheaper, investors need to assess first whether they are capable of handling their own investments, whether their selected schemes are suitable to their personal financial situations and objectives, whether they are in-line with their Risk profile or they need advice. Investors on direct plans can also take the help of Sebi-registered investment advisors (RIAs) by paying a fee.

The varying returns are quite visible. For instance, top schemes like HDFC Equity Fund, HDFC Top 200, Franklin India Prima and ICICI Prudential Focused Bluechip Fund offered annual compounded return of 16.7 per cent, 14.7 per cent, 29.9 per cent and 16.7 per cent, respectively, for regular schemes in the past three years. Had the investors come directly, the returns would have been 17.6 per cent, 15.5 per cent, 31.4 per cent and 17.8 per cent, respectively (Source: Valueresearch Online)

The Securities and Exchange Board of India has been pushing for availability of direct plans to investors for several years. In the past three years, the MF sector has obliged by launching direct plans of existing schemes.

The primary reason is lack of financial literacy among potential investors, particularly non-wealthy individuals. Overall, 38 per cent of the sector's assets have come directly. A deeper look shows it is mainly the large and well-informed ones, such as institutions and companies, which have opted for going direct. For instance, institutions put nearly 75 per cent of their assets in MFs through the direct mode; for companies, it is about 60 per cent.

Data from the Association of Mutual Funds in India shows about 16 per cent of HNIs' assets were invested directly. For non-wealthy or 'retail' individuals, it is about 10 per cent.

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