Direct plans: What, why and how to invest

Direct MF schemes save on commission, earning higher returns than regular plans

Mutual funds have traditionally been sold through advisors who double-up as brokers and get paid a commission from the mutual fund house. The commission is paid out of the return made by the fund scheme — this in effect reduces the return made by the investor in the scheme. To help savvy investors — who do not require the services of an advisor — save on the commission paid to advisors, SEBI in 2013 mandated mutual fund houses to introduce direct plans for fund schemes, in addition to regular plans.

Over the past five years, direct plans have managed to deliver 0.5-2 per cent higher returns on an annualised basis over regular plans, thanks to the saving on the commission, otherwise payable to advisors. The return differential is typically higher in the case of funds with a higher expense ratio.

Regular plans of large-cap-oriented schemes, on an average, have delivered about 15.8 per cent annualised over a five-year period. In comparison, direct plans for the same set of schemes have delivered 16.7 per cent over this period. In case of mid-cap-oriented schemes, the average five-year return of regular plans is 24.9 per cent annualised, compared with 26.3 per cent in the case of direct plans. In the case of debt funds, the average five-year annualised return of regular plans of dynamic bond funds is 7.9 per cent, compared with 8.6 per cent in the case of direct plans.

How to go direct

If you are looking to invest in direct plans of mutual fund schemes, you could do that online or offline. Online investing is convenient and faster. All you need to do is log on to the website of the mutual fund and look for invest/buy tabs. You need to be KYC-compliant to be able to invest online.

On the website of the fund house, you need to first enter either your PAN number (in case KYC was done before February 2017) or Central KYC (CKYC) identification number to get started.

You must then fill in your personal details and investment details including name, address, nominee, name of the scheme, plan (direct or regular), option (dividend/growth), amount, lump-sum or SIP mode, and SIP details. Choose ‘direct’ under the mode of investment. The next step is to provide payment details/bank account, etc, and upon confirmation, the investment will be completed. You can also buy direct online through the MF Utilities India portal, which is a shared infrastructure of AMCs (asset management companies).

You can invest through the direct route in the offline mode, too. Walk into the nearest branch office of the respective mutual fund and submit the duly filled application to invest in a direct plan. Alternatively, you can also do this at the offices of R&T (registrar-and-transfer) agents.

In case you have an ongoing SIP in a regular plan and wish to switch to the direct plan, you need to close the current SIP and start a new one. You can also switch the existing corpus in a regular plan to a direct plan. In case you want to move the corpus before the specified period is over, you will have to pay exit load, as applicable. The switch of the corpus from the regular to the direct plan can be done online or offline.

Not for all

While the returns in direct plans are higher compared with regular plans, they are only for savvy investors who can do their own research to identify the right schemes and track their performance to make course corrections, if necessary. If you are new to equities and need help in understanding the schemes and their suitability, you may be better off taking the advice of a good advisor and investing in the right scheme.

The writer is co-founder, RaNa Investment Advisors.

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