Direct Mutual Funds plans have completed four years in January 2017 and provide yet another option for savvy investors building their long-term portfolio. Introduced by SEBI as part of a wide-ranging reforms package a few years ago, direct plans allow investors to deal directly with the AMC without a distributor.
While there are several benefits of switching over to direct plans, there is also a plethora of items to take into account while considering the option.
Consistency In Portfolio
A scheme’s portfolio will be identical for both its regular and direct plans. The scheme’s supplementary characteristics such as its investment objective and strategy, asset-allocation pattern, exit load, risk factors and terms & conditions will also continue to remain the same. However, there will be a separate NAV (Net Asset Value) for direct plans. This figure is typically a few points higher than its regular counterpart.
Lower Expense Ratio
Because the direct plan makes do without a distributor acting as an intermediary between the investor and the AMC, there is no commission to be paid to the distributor that in turn translates into a lower expense ratio as compared to the fund’s corresponding regular plan.
Investor Intervention
While a direct plan is no doubt a tempting switch, it also requires more hard work from the investor as he has to establish a relationship with the AMC and complete all the paperwork and formalities by himself. He also cannot rely on a distributor’s expertise in choosing a fund to fit his portfolio. Moreover, it is relatively difficult to keep track of one’s direct investments compared to regular plans where the distributor typically offers a basket of analytics and tools to showcase the performance of the investor’s regular investments.
Higher Returns
Because of the marginally lower expense ratio of a direct plan, the returns tend to be a little higher. This will result in greater wealth creation when compounded over the long term.
While direct plans are a sensible option for an experienced Mutual Fund investor, investors should be well prepared to do their own analysis and select top performing Mutual Fund schemes that are an ideal addition into their portfolio.
For investors starting out in the trade, they are well advised to stick to regular plans and trust their distributor to take care of the various tasks that go into investing in a Mutual Fund itself: including submission of applications, tracking and consolidating a portfolio, nominee inclusion or modification, change of address, KYC compliance issues, etc.