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What are Direct Plans in Mutual Funds



We have all heard of mutual funds and the benefits they provide. Many of us have been approached by an agent or a Distributor who offers to sell us mutual funds. Here from January 1st 2013 Asset Management Companieshave to mandatorily introduce direct plans for all mutual fund schemes. It is but obvious that the distributor would not mention this to us unless asked. Let us consider a Distributor has an HNI client who puts in a few crores into Equity Schemes of a mutual fund in a year. Imagine his predicament when the direct plan in mutual funds comes in. He will lose a few Lakhs in commission. Here as we do not route our mutual fund investments through a Distributor, commission expenses to these are eliminated and the expense ratio of the mutual fund is lesser. This means in a direct plan we get a higher return from the mutual fund which might have the same portfolio investments as a normal plan. In order to improve the options of investors who do not prefer the role of Distributors SEBI has asked AMC to launch direct plans from January 1ST 2013. Don’t we all want to manage our investments ourselves if possible? Won’t we all be proud of ourselves if our own investment decisions yield good returns? I would like to remind all of you that the team of Financial Planners at Moneymindz.com are always there for you to plan your Financial needs in a most efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6211 6588.

So What Are Direct Plans In Mutual Funds?

  • The direct option in mutual funds will have no intermediary in between. The investor will be directly invested with the Asset Management Company. This eliminates the role of the agents and Distributors.
  • A mutual fund scheme has to affix the word "DIRECT" in the scheme name. Here a normal mutual fund scheme may have XYZ-Growth or XYZ-Dividend. Now we have the following XYZ – Growth - DIRECT and XYZ-Dividend -DIRECT.

So what is the expense ratio

Here we divide the mutual funds operating expenses by assets under management to get expense ratio. This expense ratio gives us an idea of how much of the fund’s assets under management are used as expenses.

Expense Ratio :

Here we have in the mutual fund sector the expense ratio around 2.3-2.5%. Due to the new rules introduced bySEBI for direct plan mutual funds the expense ratio reduces by 1.6-2.0% as agents and Distributor commissions are scrapped. These benefits accrued after SEBI stated that Asset Management Companies would have to provide direct plans in their existing and new schemes with a separate Net Asset Value from 1st January 2013.

So How Does the Introduction Of Direct Plans Help Us Monetarily :

A particular mutual fund house has a direct mutual fund plan for clients who directly invest in these schemes. Here as the Distributors Commission has been scrapped the expense ratio is lower from say 2.5% to about 2 % for these direct plan schemes. These look like very small percentages .But are they really such small amounts. Here Mr. Rajesh invests a sum of INR 6 Lakhs under the direct plan of a mutual fund scheme. He stays invested for a period of 5 years. This fund generates a return of 9% per annum on an average. Here after 5 years this amount would be INR 9,23,174. Let us assume that Mr Rajesh had gone through an agent or a distributor where he was charged a commission. This might have increased the mutual fund expense ratio by about 0.75%.His returns after 5 years would have been about INR 8,91,847. Here the difference would be around INR 31,326.This amount is saved through the direct plan. If you want to learn more about mutual funds please look up the websiteMoneymindz.com.

Impact On Net Asset Value of a Mutual Fund :

Here NAV is basically the value of all the securities in the mutual fund portfolio calculated on a daily basis. From this all expenses are deducted and the resultant value is divided by the number of units in the fund is Net Asset Value. Here if the expenses are reduced higher would be the Net Asset Value. Here a direct plan has a NAV which might be 0.5-1.0% higher than the corresponding normal mutual fund scheme .On an amount of INR 50 Lakhs this would translate to about INR 30000. The amounts would sizably increase with the passing of time.

How To Invest In A Direct Plan : :

  • When we fill up the mutual funds Investment form there is an option called the Direct Plan which we need to tick which slots us into the direct plan.
  • Once it is slotted into the direct plan even if the Distributor puts his ARN code (a unique identification code) there will be no commissions paid to him.
  • If you forget to mention the direct plan and there is no agents ARN code ,by default we are slotted in the direct plan.
  • You can fill up the form by going directly to the AMC or approach the back office partners of AMC .Just do not leave the direct box unmarked.
  • You can convert the standard plan into a direct plan by submitting a switch request. All you need to do is contact am AMC and ask for a switch request form. Now after filling this form which is like a written request your standard plan will be converted into a direct plan.
  • All Systematic Investment Plans which were made by an agent will continue to remain under standard plan and a manual request will have to be submitted in order to convert it to a direct plan.
  • If you have any SIP investments in mutual funds done after January 1st 2013 directly with AMC then you will be automatically slotted under the DIRECT plan.
  • For your ELSS Tax saving mutual funds under lock in they can only be converted into DIRECT plans after the lock in period expires.

Who Should Invest In Direct Plans :

  • Here you need to be well informed about mutual funds and the financial benefits that this sector gives along with the necessary regulations.
  • You need to track the portfolio of the mutual fund scheme.
  • You need to invest with the AMC Directly. Here Distributors make use of the customer’s lack of time and knowledge which might even lead to mis selling. You basically need to know what you are getting into.

Who should Not Invest In Direct Plan?

  • If you do not have necessary expertise and experience you should desist from making your own investment decisions.
  • You should have time to track and make your investment decisions. If Not Think Hard .....
  • If you have a good advisor doing a good job let him continue doing so ...
Mutual Funds
Mutual Funds