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.
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.
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.