In one of my earlier posts, I discussed how you can avoid distribution costs by investing in direct plans of mutual fund schemes. I also established the quantum of long-term savings you stood to make by investing in direct plans of MF schemes. To find out more about direct plans, read my article in Business Standard about direct plans of mutual funds here.
In this post, I will address some of the common doubts investors have regarding direct plans of mutual fund schemes.
Read: Performance Comparison: Direct Mutual Funds Vs. Regular Mutual Funds
Why NAV of direct plans is higher than the NAV of regular plans? You get a lesser number of units in direct plans.
Yes, you get a lesser number of units of direct plans because the NAV is higher.
And NAV of direct plans is higher than the NAV of regular plans because direct plans provide better returns.
A few investors may think that they are getting a better deal in regular plans because they are getting more number of units. Nothing could be further from the truth.
Such an approach is akin to investing in new fund offers (NFOs) because the NAV is low or in a stock because its market price is low. A low NAV does not mean that the fund is cheaper or better. In fact, it may mean quite to the contrary. A lot of investors preferred to invest in NFOs for the same reason. Fortunately, due to regulatory intervention and investor awareness, most investors have shunned this approach.
While comparing two investment products, you must compare the associated risk and return levels.
Since the risk is the same in the direct and regular plans, you must compare the return levels.
Direct plans cannot underperform regular plans. It is a mathematical construct.
As long as 2+2=4, direct plans will continue to outperform regular plans.
Everything (portfolio, fund manager, etc) is the same under direct and regular plans except the distribution cost. Since there is no intermediary in direct plans, distribution costs are avoided and that reflects in better returns.
Let’s consider an example. We will consider an investment of Rs 10 lacs each in direct and regular plans of the same scheme. We have assumed an annual return of 10% in regular plan and 10.75% in the direct plan.
You can see that even though you got a lesser number of units in direct plans, you still ended up with a larger corpus at the end of the year. This is because the difference between the NAVs has grown.
Earlier, it was Rs 10. After one year, it is Rs 11.8. The difference in NAV will keep getting bigger.
Hence, direct plans will give you better returns than regular plans. It is a FACT.
Can I purchase mutual fund direct plans under the same folio?
Yes, you can. If you have been investing through a distributor and already have a folio with a MF house, your investment in direct plans of the scheme can be kept under the same folio.
So, under the same folio, you can have direct and regular plans of MF schemes. Folio number is a unique identifier for your investments with a particular mutual fund house. All your investments with a fund house can be identified with a unique folio number.
Are you comfortable with online transactions?
There are many ways to invest online in direct plans of mutual fund schemes. Go through this post for the list of direct mutual fund websites.
If you are not comfortable investing in mutual funds online. you can invest in direct mutual funds offline too. You will have to visit an AMC branch and RTA branch (CAMS, Karvy, Franklin).
To avoid any confusion, write “Direct Plan” in front of scheme name (in case of physical/offline purchase). Or if you are investing online, you will find “Direct” appended in front of scheme name.
A bank will get you invested in Regular plans only (and not direct plans)
A few people have complained that they went to a bank to invest in direct plans but got invested in a regular plan. You must understand banks act as distributor/intermediary of mutual fund houses and get commissions just like other distributors. If you go to banks for investing in mutual funds, you will always get invested in the regular plan of mutual fund schemes.
So, if you go to Axis Bank and invest in any MF scheme of Axis MF, you will always end up investing in a regular plan. Visit the nearest local branch of the mutual fund house if you want to invest in direct plans.
To me, online is always more convenient.
PersonalFinancePlan Take
Direct mutual funds will always outperform the regular plan of the same MF scheme. However, before you invest in the direct plan of MF scheme, you need to find a good (right) mutual fund to invest in.
Direct plans are best suited to do-it-yourself investors, who are willing to devote time and energy to research mutual funds on their own. Such investors can save costs by investing in direct plans.
If you can’t pick the right funds on your own, you can approach a SEBI Registered Investment Advisor or fee-only financial planner and seek investment advice from him/her. Such advisers assist you in constructing your portfolio. You can subsequently invest in direct mutual funds.
Your advisor can also help you in shifting your existing mutual funds investments in regular plans to direct plans.
If you cannot select the right funds for you on your own and do not want to pay the fees of a SEBI RIA either, you may approach an MF distributor for advice. Though distributors will get you invested in regular plans, they can guide you about your MF investments. I would rather invest in a regular plan of an excellent (right) fund than a direct plan of a mediocre (inappropriate) fund.
Where would you invest? Direct mutual funds or Regular mutual funds?
Image Credit: Simon Cunningham/LendingMemo[dot]com, 2013. Original Image and information about usage rights can be downloaded from Flickr.
The post was first published on August 13, 2015 and has been updated since.
51 thoughts on “Why NAV of Direct Plans is higher than Regular Plans of MF schemes”
If i invest in direct plans of mutual funds using my CAN, will the units be hend in my Demat account or in a seperate account maintined by MFU?
With CAN, only your existing folios are mapped to CAN. Nothing more than that.
You can hold your MF units in demat account or you can hold it in folios with AMCs.
From operational perspective, there is not much difference.
I do not hold my units in demat account.
Hi. Deepest. I have brought. Icici balance advantage fund as sip 5. K monthly. As direct. Fund. For 5. Years. Kindly advice how s this fund. . Also what’s the best equity. Funds. I like to have investment two. More. Good funds
Thanks Deepesh for such an useful post. I am planning to start a SIP on ELSS – Axis Long Term Equity Fund and looking to go for Direct fund. I found it a good performing fund and looking to invest without Distributor, kindly suggest your thoughts on this.
You are welcome, Sudhir.
The fund has done well. So, you can invest.
Please understand my suggestion is in absence of any other information about you such as your goals, risk profile, investment horizon etc.
Thanks Deepesh for your prompt reply. Only just a few generic questions. I am planning to start a SIP online under Direct plan. Would you be able to suggest how can I choose to close SIP when I no longer want to invest further on any plan? Are there any charges for that as well?
You are welcome Sudhir.
About how to do it, depends on the platform you are using. How are you planning to start SIP in direct plan?
AMC portal, MFU etc?
Typically, there are no charges for cancelling SIPs.
Thanks Deepesh. I am planning a SIP in direct plan through AMC portal itself.
Fairly simple then. You can stop SIPs from AMC portals. There won’t be any charges.
I am a new investor.I want to invest in SBI Magnum Tax gain direct (not in SIP method) but confused which option I should select growth or dividend.
Also I want to know in mutual fund investment is there any type of decision making after choosing a AMC , i.e. choosing the best share to invest or the profitable sector?
Dear Ranjit,
Invest in Growth option.
Even after selecting AMC, you need to select the right scheme.
Review your portfolio at regular intervals.
Thanks for the decision.
A question related to this .I have withdrawn a SBI Mutual Fund application form from a SBI branch. It is already provided a ARN printed on the form. I want to know whether they charge directly or indirectly any thing for acting as a distributor. As in MF Regular the dividend % is deducted indirectly.
Also Please clarify the point about scheme in details and whether I opt for regular or stick to direct
Thanks for the decision.
A question related to this .I have withdrawn a SBI Mutual Fund application form from a SBI branch. It is already provided a ARN printed on the form. I want to know whether they charge directly or indirectly any thing for acting as a distributor. As in MF Regular the dividend % is deducted indirectly.
Also please clarify the point you told about scheme in details.
Whether I opt for regular or stick to direct?
In my opinion, banks are the worst places to seek financial advice.
Banks will always get you invested in regular plans. They act as distributors.
Under regular plans, AMC pays commission to them. You don’t have to pay anything directly. But AMC is paying from your money only.
Thanks for the decision.
A question related to this .I have withdrawn a SBI Mutual Fund application form from a SBI branch. It is already provided a ARN printed on the form. I want to know whether they charge directly or indirectly any thing for acting as a distributor. As in MF Regular the dividend % is deducted indirectly.
Please also clarify the point scheme.
Whether I stick to direct or opt for regular.
An AMC offers multiple schemes. You got to choose the right scheme.
For instance, SBI Magnum offers many types of funds.
Go for direct plans. If you need advice in fund selection, go with a fee-only financial planner.
You can also visit the offerings page on my website.
http://www.personalfinanceplan.in/our-offerings/
Thanks Deepesh for your valuable opinion.
Hi Deepesh,
Your explanations are awesome! Pls keep up your work. I have till now invested in MFs via SIP through a investment planning company. I have been given login in their site where I can view my complete portfolio. I am also charged 2% of my portfolio value and also given regular plans only – MFs SIPs.
What should I do now? I dnt want to hold regular plans when direct plans can give me more NAVs. Please suggest…
Thanks Nithya.
Those guys better be good. Otherwise they are charging too much.
You can stop further investments in regular plans. Cancel all your existing SIPs. Subsequently, you can switch your units in regular plans to direct plans depending upon exit load and capital gains tax implications.
Start SIPs in direct plans of Mutual fund schemes.
About how to invest in direct plans of MF schemes, you can walk into branches of respective mutual fund houses and visit nearest CAMS or Karvy branches
please go through the following posts.
http://www.personalfinanceplan.in/mutual-funds/how-to-register-with-mf-utility/
http://www.personalfinanceplan.in/mutual-funds/you-can-get-discounts-on-mutual-fund-investments-too/ (This is an old post)
Dear Mr. Deepesh,
I have invested Rs. 1000000 (Ten Lakhs) in Liquid funds such as ICICI Pru Liquid – Direct Plan – Growth, Birla Sun Life Cash Plus – Direct Plan. These investments were made just 3 months back. Now, if i want to redeem these funds, what will be the exit load and tax implications ( I am falling under 30% tax slab).
Eagerly looking forward to hear from you.
Thank you,
Regards,
Arvind
Dear Arvind,
Don’t worry much. For liquid funds, the difference in expense ratio is quite low.
Won’t make much difference since you don’t invest in liquid funds for the long term.
Liquid funds don’t have exit load. No point paying capital gains tax. Redeem as and when needed.
Make future investments in direct plans.
sir if i buy mutual fund (sip) from MFU and put in Dmat A/C with some other depository then can i sell it through MFU ?
You will have to sell through a broker. Can’t sell through MFU.
I have never tried this myself.
Don’t see much benefit of keeping MF units in demat account.
Hi deepesh
can u suggest which plane is better in axis long term equity fund ..direct or reguler?
If you have finalized the fund, go direct.
So, I have read on advantages of direct mutual funds (in comparison to regular plans).
But, on reading the drawbacks of direct funds, the mostly seen argument is its lack of financial advice, especially when markets fall.
What I don’t understand here is, if both regular and direct plans invest in same portfolio(ie, same sector, same companies),what happens on a market crush.
Won’t the asset manager himself change the portfolio mix, to suit the market.(Change the companies in the fund’s portfolio).
Why do I need an advice in a market fall!
And, what exactly will be this advice for regular plan customers. Is it to switch to some other fund under same AMC?
Firstly, not everybody needs financial advice. Many can do without it. For such investors, there is no reason why they should invest in regular plans.
Secondly, it is not as if advisers hold a magic wand. They can’t stop markets from falling or rising.
Both direct and regular plan will fall if the markets move adversely since the underlying portfolio is same.
Just that, for those who can’t do without advice, a good adviser can help in managing emotions, help construct a good portfolio suited for their needs (investor can have really strange portfolios) etc.
But even for that, you don’t need to invest in regular plans. You can pay for advice and subsequently invest in direct plans.
Do you think its sensible to finalize a direct fund, purely based on its ranking/performance history, as seen in CRISIL website, Valuereasearch, morningstar etc.
Or, is it better to take opinion from an advisor?
In my opinion, you can’t just rely on ranking/past performance.
More than the right fund, you need to decide the right kind of fund for your requirement. Asset allocation is quite critical.
Hi Deepest,
Can u suggest which plan better in icici short term liquid funds.. direct or regular???
Hi Mohsin,
If you mean better returns, direct plan of a MF scheme will always give better returns that regular plan of the same MF scheme.
everything is fine,but when it comes to financial investment decision making we(Indian Investors)behaves in greedy manner.
We neither takes the advice from RIA/CFP nor through MF distributor.At the end we understand “something is better than nothing.”
You are right. That’s the way it is.
It is not about whether we are greedy. Nobody wants to spend more than he/she thinks the item/service is worth. And that’s right too.
In financial instruments, gratification can be delayed. Therefore, people find it difficult the appreciate the value of advice. Hence, the reluctance to pay fee.
And that’s why many fee are comfortable with implicit fee (commission) where they do not have to pay fee explicitly.
However, I have observed the slight change in mindset over the last couple of years.
Btw, CPF is merely a certification, not the license to offer investment advisory services in India.
Hello sir, can I take direct plans through. Demat account in angel bro ,
You can holding direct plan units in demat account.
However, I do not think Angel broking offers direct plans.
Hi Deepesh,
Its a nice article. I have a short term goal to build a house in next 4 years. After my research i found debt funds is the best for short term. I have two questions here.
1) Should i invest in only 1 fund or 2-3 funds?
2) If a fund doesn’t perform well after 1 or 2 year, can i transfer it to other fund or I can close it and start a fresh investing?
thanks in advance
Hi Yogarajan,
In case of debt funds, under-performance or out-performance may have have clearly identifiable reason. Therefore, don’t focus too much on performance.
Pick up a (or two for your comfort) high credit quality ultra short term debt fund (with a low expense ratio) and relax.
Hi Deepesh,
I have seen direct plan of Invesco Dynamic Equity is lossing much more than a regular plan.Is it possible?
No.
As I see, direct has done better.
Hi Deepesh,
Thanks for your efforts in answering the queries!
After a little research that I have done on MFs, I believe, IDFC’s Tax advantage Direct Growth plan is good to start my MF investment journey. I plan to invest for a longer term (though with minimal amount on SIPs to start with, before I get a flavour of this MF world), to be able to fund my son’s education after 10+ years (he is 5 yo now).
have couple of queries around it:
-Do you think, my choice is worth enough? – choosing IDFC Tax advantage – my choice is purely based on ranking and past performance, as I am a novice in financial planning.
-Can I increase the SIP amount in future for the same fund or do I need to open another fund account to increase my investment on same fund?
– I am yet to make the final move of investing. Any advice from you will help me immensely.
Thanks a lot
Bhavitha
Hi Bhavitha,
I refrain from my advice on specific stocks or funds.
The key is that you invest in the equity funds for the long term. You got this part perfectly right.
Typically, the increase in SIP amount is not permitted. However, you can start a second SIP for the differential amount in the same fund later. There is no need to open another account.
Suggest you work with an advisor in your city. He/she will be able to guide you better.
How about getting the list of regular mutual funds adviced from mutual fund advisor by creating an account with them and buying corresponding direct plan mutual fund from the fund provider.
Hi Deepesh,
As per this financial year LTCG on ELSS, Can investor proceed further on ELSS?
Thanks
VIshwa
Hi Vishwanatha,
Yes, you can invest in ELSS even in this financial year.
LTCG has been introduced on all equity funds (and not just ELSS).
How can I know Nav of fund before investing. The nav update takes place at night, where as you have to invest before 2:00 Pm
Hi Deepesh
yesterday night I have started one SIP of Rs 1000/-in ABSL PURE VALUE FUND DIRECT GROWTH Through CAMS app. The NAV value of ABSL PURE VALUE FUND DIRECT GROWTH was 54.253.but today massage comes that your fund is invested with NAV value of 58.4753. today’s NAV is not 58.4753.why it is so
Hi Prakash,
This should not happen.
Request you to check the account statement too. If the discrepancy is still there, contact CAMS or the AMC.
Will get sorted out. Don’t worry much.
this seems not to be true always,
for example recently axis long term equity (ELSS) declared dividend both in direct and in regular plan.
1. Dividend in regular plan it is less than 50% of regular plan.
2. NAV is also negative more than that of regular plan.
hi deepesh, finally a relevant article. all others keep repeating the same basic stuff without any insight. i have one query though. i dont understand how absence of distributor costs will make direct plans give higher returns. the appreciation of the AUM will be same for direct and regular. If TER for direct and regular are % on the AUM these will also increase proportionately and even the % change in NAV for direct and regular will be proportionate, i was preparing the scenario and could not figure this out.
Thanks Saikat.
Think in terms of quantum of investment. No. of units and NAV can confuse you.
Btw, the change in NAV will not be the same. NAV of direct plans will rise faster.
I have started the below investments(direct mode) with a time horizon of 15 yrs.
My risk profile is moderate-high.
1)
Axis Multicap -1500 p/m
Axis Midcap – 2000 p/m
Mirae asset emerging bluechip – 1500 p/m
Can you please tell me if my selections are fine or they need some changes ?
2) Next plans :— Please suggest any other fund if below funds are not the best ?
HDFC small cap (or) Axis small cap- 2000 p/m
3) How good is ABSL liquid fund-3000 p/m (solely to create an emergency fund) ?
Thanks in Advance !
Paresh