After writing a blog on a variety of topics, something that a lot of people requested us to probe into greater details about the mode of investing in mutual funds. Back in 2013, the capital market regulator - SEBI directed the AMCs (Asset Management Companies) to launch their funds in two different flavours, i.e. Regular and Direct mutual funds for all their current mutual fund schemes.
There is always seen an argument over choosing between direct and regular mutual funds. Regular and direct mutual fund schemes are just the two options to buy the same mutual fund scheme, run by the same manager who invests in the same stocks and bonds with the same amount of exposure in them. The crucial difference between two isin the case of regular plan, your AMC or fund house pays a regular commission to your broker or middleman as distribution expenses or transaction fee out of your investment corpus.Indeed, the situation is identical to almost any other product or services. If the manufacturer is supplying goods directly to the customer, then the cost can lower due to the absence of intermediary. The amount of commission varies between 0.75 – 2 percent per year. Whereas, a direct mutual fund plans, do not have any such commission to the dealer or distributor and along these lines offer higher returns.
3 Main Reasons Why Investing in Direct Mutual Funds makes Sense –
The low-cost direct mutual funds are slowly gaining popularity, especially among HNIs and corporate investors. However, many small investors are still stuck with high-cost regular plans. This is primarily due to lack of awareness.
1. Higher return means a much bigger corpus –
The fund management style and the expenses in both types of mutual funds are almost identical. Since regular funds offer a commission to other intermediaries from your investment pie; hence regular mutual funds eat up an extra 1 - 2 percent of your investments in the form of commissions every year. Although your monthly statement doesn’t reflect this amount, the NAV or net asset value of your mutual fund units adjust accordingly, which is not the case in the direct schemes. You can avoid this loss of wealth, and it’s a wiser option to invest in direct mutual funds which don’t offer such commissions.
Let’s understand this with an example: Assume you have invested Rs. 5,000 p.m. each in a direct and regular mutual fund scheme with an annual return of 12% considering a 2% expense ratio for a regular scheme.
Since mutual funds are the instruments meant for long-term investments, you would see that the return differ quite a lot. If you let the investment grow in the same way for 15 years, there will be a difference in earnings of Rs. 4,25,549, which is enormous compared to investment size and this entire amount goes to the advisors or agents as a commission.
Another way of looking at it is 1% (Assumption) as a percentage of return doesn't matter, obviously 1/100 doesn't matter (it's small enough number). If you expect to earn about 8% each year, giving away 1% of that is giving away 1/8 that's 12.5% giving away of your return every single year, and that's significant.
2. Brings Greater Convenience and Excellent Service Time–
Online platforms providing mutual fund utility for various fund houses and schemes, some platforms also provide data to enable research. Accessing free tools offered to research across mutual fund schemes from AMCs, users get comprehensive information about each plan, including past performance, historical returns, fund manager profiles, ratings, category performance, risk assessments and much more and this is the convenience which DIY investors want. You don’t require to see your physical advisors.It’s just way more convenient to track your MFs on the broker’s platform. Moreover, if you sell or switch your direct mutual fund investment, you won’t be charged any fees or commissions.
3. Comprehensive Scheme Aligned with your Goals and No Mis-selling
Many offline customers have a terrible experience with MF advisors and their services. People who go into bank branches asking for tax-saving funds walkout with focused funds or ULIPs (Unit Linked Insurance Plan), which is not at all suited considering their requirements. It’s a messy and often confusing affair trying to get the right advice from the distributor.
Most advisors just end up recommending mutual funds in which they have vested interest in the scheme or fund houses pay handsome commissions or which look better for them.The advice is thus biased towards whichever mutual fund gives the distributor higher commissions, thereby potentially mis selling a product happen which is not at all suitable to the unknowing investor.
Most people are unaware about the advantages of direct mutual fund. However, direct mutual fund platforms are making inroads and trying to make the mutual fund investing extremely simple and frictionless without any human intervention.