A little over three years ago SEBI directed the manufacturers of mutual fund product to provide with an option of direct plans to investors. Essentially it meant that the investor could circumvent the distributor and invest directly with the Amc’s. Direct Plans are essentially a lower cost option cutting out commission and marketing expense paid out to the distributor. The changes in Net Asset Value reflect the appreciation or decline in the value of the assets held by the scheme over a period of time. Expenses under different heads like fund management charges, sales and marketing fees etc are charged against the NAV.
Every scheme which is sold and marketed by an Asset Management company now has a direct plan option available for investors to opt for.
Expense ratio is the cost of running and managing a mutual fund which is charged to the investor. It includes fund management fees, marketing or selling expenses, transaction costs, investor communication costs, service tax, custodian fees, and registrar fees. The expense ratio is calculated as a percentage of the fund’s average net asset value (NAV). The daily NAV that a fund puts out in the public domain is after deducting the expense ratio.
Mutual funds are not allowed to charge whatever they please as expense ratio , maximum limits are prescribed by SEBI – maximum 2.5% for the first 1billion (average weekly net assets), 2.25 % for next 3 billion , 2 % for the subsequent 3 billion and 1.75 % for the balance corpus. In case of index funds or exchange traded funds, the total expense ratio of the fund shall not exceed 1.5%. For debt funds, the expense ratio allowed is 0.25 percentage points lower than equity funds.
Mutual funds have been allowed to charge up to 30 bps more if 30 per cent or more of their new inflows come from locations beyond the top 15 (T15) cities. A proportionate charge is allowed if the new inflows from the B15 (beyond top 15) locations is less than 30 per cent.
The expense ratio charged to the scheme would be lower in a direct plan as against a regular plan as direct plan will not levy the sales and distribution charge which is primarily the commission. It follows therefore if a lower expense is charged; the NAV will be higher for direct plans as against the regular plans of the same scheme.
Typically the difference in expense ratio between a direct and regular plan option of an equity scheme is between 0.5% – 0.9%. Over a period of time the difference in expense ratio can result in a sizeable difference in the return.For Debt schemes the difference in expense ratio is typically 0.3% – 0.5%.For a money market scheme the difference in expense ratio is typically 0.20% – 0.3%.
For example if an investor A invests in ABC equity scheme through regular plan with an investment amount of Rs 1 lac for 15 years.
In case the scheme performs well and assuming the scheme returns a CAGR of 15% p.a. Assuming the regular plans charges additional 0.75% charge, it will give a CAGR of 14.25%.
As is evident over a period of time, the savings in cost and the increase in the returns can be substantial if a lower expense is charged.
Although direct plans have been in existence only for three years or so the AUM have grown substantially to close to 35% of the total AUM (Source: newspapers reports &AMFI website) which is quite a sizeable proportion of the total AUM.
If one looks at the category wise classification of AUM of direct plans the bulk of it is liquid, money market and gilt funds. Industry sources say that majority of investors who have opted are Institutional or Corporate Investors who invest large sums of money and even a fraction of percentage of difference in cost makes a material difference in their return.
But these options are available to retail investors as well. As long as they are aware , savvy investors and know exactly what they wish to invest in they can very well opt for a lower cost plans and increase their overall return.
Some of the options available for investors are :
- Individual Websites of mutual funds: Investors can log in to individual websites and if they have a valid folio and KYC, can directly link their bank account and invest and redeem in schemes with direct options.
- MyCAms : This is a portal which is promoted by Computer Age Management System which is the registrar for many mutual fund products. They have a tie up with 15 Amc’s and investors can invest in the direct plans of these.
- MFUtility: This is a portal which is promoted by Amfi and supports 25 Amc’s currently. Their main website is https://www.mfuindia.com/. You may have to first open an account at the main website and then can invest by logging in to their direct plan platform, https://www.mfuonline.com/.
Apart from these there are new startups such as Orowealth, Investza, which give options for investors to invest in direct plans. Since they don’t earn commissions they may charge a flat or an advisory fee based on the level of services.
The process to invest is quite easy on some sites and a bit cumbersome on others, even so it is a onetime effort which investors need to go through and then after the initial hurdles are surpassed it is a breeze to invest and exit out of mutual fund schemes.
Today the mutual fund Investor is spoilt for choice as regards the types and variety of schemes available to them for investing. Direct plans are meant for experienced investors who do not need handholding operationally and don’t need much advice or sales support.
Opt for them by all means if you are a sharp knowledgeable investor or have availed of advisory services via a financial planner or an advisor. You have to know the exact name of the scheme and the impact cost of exit in terms of loads and taxation.
If you are new to mutual fund investing, be cautious as you may end up burning your fingers which will result in costing you more than the savings in terms of a lower expense ratio.