The number of investors opting for the “direct” route when investing in mutual funds is on the rise, if the increase in total assets under management, or AUM, under these plans is anything to go by. The share of direct plans has improved from about 25% of the overall industry AUMs in April 2013 to about 33% by February 2014.
Looking under the hood though throws up a different picture. The bulk of the AUM under the direct route is in the debt and liquid category -- not surprising since corporate treasuries and institutional investors are responsible for the inflows here. It is obvious that the retail investor has not yet got comfortable with this route as only 8% of the equity AUMs have come in via the direct plans.
Should you go “direct”?
Direct plans – those not routed through a distributor, have a lower NAV than those of regular plans.
Since the distributor is not involved, there is no commission to be paid. Due to this, direct plans have a lower expense ratio as compared to existing plans in the same schemes. The existing plans – now referred to as regular plans – would have a higher expense ratio on account of the distributor commissions which are paid out from the expenses. Direct plans generally tend to have expenses which are lower by 40-70bps as compared to the regular ones.
These lower expenses would naturally get reflected in different NAVs for both plans.
The downside of investing through direct plans is that the investor would need to do the running around for investing in a fund. However, the transactional aspect of investing should not be much of a bother for those with access to the internet, specially since most AMCs allow you to invest online.
The tough part is deciding which fund to opt for based on one’s risk profile and period of investing.
The answer lies in your ability as an investor to choose schemes or funds which meet your requirements. If you have knowledge on mutual funds or have access to unbiased research on mutual funds, which you can study prior to investing, then direct plans is the way to go. On the other hand, if your financial advisor is really adding value to your investments by understanding your risk profile and financial goals and providing unbiased advice to ensure that your financial goals are met then you can continue to invest through your financial advisor.
My colleague has tackled this topic is detail in Should you invest directly or through a distributor?
What you must know
- Investments under the direct plan are open to all investors who choose to invest without a distributor.
- Characteristics such as the composition of the portfolio, investment objective, asset allocation pattern, investment strategy, exit load, risk factors, facilities offered and other terms and conditions are identical for direct and regular plans of the same scheme.
- The NAV would differ marginally for both type of plans – direct and regular.