Direct plans to invest in mutual funds are a cheaper option. But without proper advice, investing in a wrong mutual fund scheme and/or poor knowledge of the investment process could prove costly
With investors having the option of investing in direct plans from 1st January, it would be interesting to see by how much the fund houses would reduce the costs for direct investors. Fund houses would now have two plans under each scheme. One is the regular plan and the other would be the direct plan with a separate Net Asset Value (NAV). The direct plan would have lower costs. Therefore over the long-term, direct investors would benefit. But how much this difference would be depends more on how much fund houses would be willing to reduce the costs.
Moneylife did an analysis on the Net Asset Value (NAV) of schemes as on 8 January 2013. Of the 187 equity diversified schemes where the NAV was available, in around 48 schemes there was no difference at all in the NAV of the direct plan and the regular plan. As for most of the remaining schemes, the difference the varied from 0.10 basis points (bps) to 1.50 bps. Though this may not seem that huge, but for a short period of a few days it is a considerable difference. Over time the gap would widen. The difference in expense ratio would be around 30 bps to 75 bps for most schemes. Fund houses would also have to keep in mind their distributors; hence, it would be rare to see a higher reduction in expense ratio for direct plans. Existing investors can switch to direct plans, as well. However, many schemes have raised their exit loads which would in turn deter investors from switching to the direct plans within a short time frame.
To take advantage of a lower NAV, direct investors would have to invest on their own, without the help of a distributor or advisor. Direct plans will benefit those investors who believe in doing things on their own. But investing in mutual funds is complex.
What kind of scheme should one choose? How much should they invest? Whether one should opt for a systematic investment? One needs to look at the performance of the schemes over various periods. What would be the cost of choosing a wrong equity scheme? Take for example the 1 year period ending 31 December 2012. The top 10 equity diversified schemes delivered an average return of 50.50% and the bottom 10 schemes delivered an average return of just 20.82%. There is almost a 30 percentage point difference in returns. Take the last three year period, had one invested in the bottom 10 schemes they could have faced a loss in capital, as the average returns of the schemes was -1.07% annualised. Any one of the top 10 schemes would have earned them over 12.50% annualised in the same period.
But choosing a scheme is just one part of the story. One would also have to find time to do the documentation process. Direct investors may find it difficult to keep up with the various changes in regulations and documentation process without an advisor. There are various servicing activities like change of address, change of bank mandate, consolidation of folios, transmission of funds, inclusion of nominee, handholding on minor investments, arranging for periodical statement of accounts, correction of mistakes in the account, change in KYC, change in contact information, etc. If an investor has in-depth knowledge of all this it would be easy to invest.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
I think this is a hastily implemented plan. I have been investing in MFs directly without a broker for quite a while. A direct plan would have been good for investors like me if they had considered the following points:
a)The minimum amount of investment in direct plan should have been waived off for existing investors. I need to find 5 or 10k as the case may be to invest in direct plan instead of my 1000 reinvestment in the existing plan. SEBI has never thought about the common investors who cannot afford high amounts anyways.
b) Though there is no exit load in switching from a regular plan to direct plan, there is certainly STT that is charged if STT is applicable on the fund. Why should I lose that money and it complicates the calculation as to whether it is beneficial to switch.
c) Capital gains.... I think nobody thought about it. When I am switching from my regular plan to direct plan, I need to consider it as a redemption and investment. I will lose all my Long Term capital gains benefit if the period is less than 1 year, even though I am just shifting to the direct plan of the same fund.
When will SEBI start thinking before implementing ?
Distributors and AMCs have a powerful say and representation with SEBI. A common investor is represented merely by a few individuals of SEBI.
As is clear by now, both distributors and AMCs who are hand in gloves with each other want to just make it difficult to switch plans.
Hence it is very difficult to bring this to the notice of SEBI.
Ideally, this should not be considered as a switch at all. But who will bell the cat?
Lastly, the customer care of the MFs are not at all equipped to handle the queries of Direct plan the day they implemented it. (01st January 2013). They gave me a lot of Incorrect information and I had to teach them by showing the circular.
Thanks.
You would have to submit the application form at the office of the fund house or at the registrar of the fund house.
Some fund houses may have separate application Forms for investors subscribing under Regular Plan & Direct Plan.
Or else, investors applying under Direct Plan can also fill the Regular Plan form, but should clearly indicate "Direct" in the ARN column of the application form.
Also, where application for Regular Plan is submitted without Distributor code or "Direct" mentioned in the ARN Column, the application will be processed under Direct Plan
A walk in customer comes in and asks for "Direct Plan Details".
The clerk at the Reception said "yes sir, Direct is good, NAV is very cheap and you will make huge profit".
Customer : "I want to invest in International Fund, which is the Best"?
The Clerk "sir, ICICI is the BEST in the industry. You can blindly go for the same. Come sir, I will help you fill the application".
I could only laugh at the ignorance of both the clerk and the customer.
ICICI Indo Asia Fund which the clerk was referring to.......is not even in the list of Top International funds according to Valueresearch list and the Fund has been, in fact, listed under EQUITY - LARGE CAP and the clerk had the audacity to recommend this Fund as a International Fund.
Of course, the Clerk obviously will not recommend his rivals fund such as L&T Global Real Assets fund or the DSP BLACKROCK Natural Resources and New Energy Fund.
Expect more of such Non-sense recommendations when you go DIRECT!!
"They also serve who only stand and wait" - John Milton
Mohana Ganesh
You can still continue to have both regular plan and direct plan in the same folio
Yes you can have the same fund in both plans.
In case if you still have doubt, I would suggest you to download the addendum from the AMC website.
All these years, some of the popular distributors provided merely a portal, that too barely worked for purchase and sale of units and lousy customer service which took at least 5 attempts on average to understand customer issue.
If you want to suddenly make a customer start valuing you as "advisor" just remember what you provided to customer as "advice" all these days.
Sad thing is AMCs are a party to this. I tried asking a few AMCs regarding opening a new folio and first thing they say is they prefer us going through a distributor.
This is nothing short of a scam of sorts.
Coming to the NAV part, according to the addendum released by UTI and HDFC, the NAV of direct plan would mirror the NAV of regular plan till the first investor comes in. Once he comes in, then direct plan would have its own NAV. Addendem of IDFC has a different take on this. For all investments on 1st Jan 2013, the NAV would be the one for regular plan. If there is no investment, they would consider the NAV as 10 Rs.
What I was most surprised was that ICICI - the fund house which has revised its exit loads hasn't released any such addendum about direct plans. However I went ahead and registered for an SIP giving the fund name as "Fund Name - Direct Plan" as mentioned in addendum of other fund houses. They have registered my SIP in the regular plan itself. I am trying to follow up on this. Still in progress....