Mutual funds: Regular plan Vs Direct plan

 In 2013, SEBI introduced the Direct plan which are mutual funds which investors invest directly contacting the fund house. The intention of SEBI was to segregate the sales and distribution costs and charge these costs only to regular plans. So that direct plans will be free from these additional costs. Investors who invest in direct plans have not used the distribution services and hence need to pay it. 

Total Expense Ratio (TER)

Total Expense ratio refers to the percentage of expenses to the Assets under management of each fund. The expense ratio includes fund management costs, operations costs, marketing and distributions costs. For direct plans, there is no marketing and distribution costs, only management and operational costs. Typically, equity funds regular plans have an expense ratio of 2.0% to 2.5% and direct plans have a expense ratio of 1.0% to 1.25%. 

Difference in returns

The difference in Expense ratio will obviously translate into lower returns for Regular plans when compared the Direct plan of the same fund. The difference in returns per annum is between 1% to 1.25%. Is this significant? Distributors will convince you in choosing the regular plan underplaying the importance of this 1 to 1.25% difference in performance. They have their own interests to take care of! But it is in your interest to understand that this is not a small difference over a period of 30 years. Let us compare.

Let us consider 2 cases, one is a lumpsum investment for 30

years and the other is a monthly SIP over 30 years. The assumptions are:

Regular plan returns per year: 9%

Direct plan returns per year: 10%

Lumpsum : Rs. 10 Lakhs

             

Regular

Direct

 % Difference

1

    10,00,000

    10,00,000

0.00%

2

    10,90,000

    11,00,000

0.92%

3

    11,88,100

    12,10,000

1.84%

4

    12,95,029

    13,31,000

2.78%

5

    14,11,582

    14,64,100

3.72%

6

    15,38,624

    16,10,510

4.67%

7

    16,77,100

    17,71,561

5.63%

8

    18,28,039

    19,48,717

6.60%

9

    19,92,563

    21,43,589

7.58%

10

    21,71,893

    23,57,948

8.57%

11

    23,67,364

    25,93,742

9.56%

12

    25,80,426

    28,53,117

10.57%

13

    28,12,665

    31,38,428

11.58%

14

    30,65,805

    34,52,271

12.61%

15

    33,41,727

    37,97,498

13.64%

16

    36,42,482

    41,77,248

14.68%

17

    39,70,306

    45,94,973

15.73%

18

    43,27,633

    50,54,470

16.80%

19

    47,17,120

    55,59,917

17.87%

20

    51,41,661

    61,15,909

18.95%

21

    56,04,411

    67,27,500

20.04%

22

    61,08,808

    74,00,250

21.14%

23

    66,58,600

    81,40,275

22.25%

24

    72,57,874

    89,54,302

23.37%

25

    79,11,083

    98,49,733

24.51%

26

    86,23,081

 1,08,34,706

25.65%

27

    93,99,158

 1,19,18,177

26.80%

28

 1,02,45,082

 1,31,09,994

27.96%

29

 1,11,67,140

 1,44,20,994

29.14%

30

 1,21,72,182

 1,58,63,093

30.32%

As can be seen, the small difference of 1% per year becomes a significant difference of 30% after 30 years!

Let us now consider the case of SIP of Rs. 20,000 per month

Year

Regular

Direct

 % Difference

1

      2,40,000

      2,40,000

0.00%

2

      5,01,600

      5,04,000

0.48%

3

      7,86,744

      7,94,400

0.97%

4

    10,97,551

    11,13,840

1.48%

5

    14,36,331

    14,65,224

2.01%

6

    18,05,600

    18,51,746

2.56%

7

    22,08,104

    22,76,921

3.12%

8

    26,46,834

    27,44,613

3.69%

9

    31,25,049

    32,59,074

4.29%

10

    36,46,303

    38,24,982

4.90%

11

    42,14,470

    44,47,480

5.53%

12

    48,33,773

    51,32,228

6.17%

13

    55,08,812

    58,85,451

6.84%

14

    62,44,605

    67,13,996

7.52%

15

    70,46,620

    76,25,396

8.21%

16

    79,20,816

    86,27,935

8.93%

17

    88,73,689

    97,30,729

9.66%

18

    99,12,321

 1,09,43,802

10.41%

19

 1,10,44,430

 1,22,78,182

11.17%

20

 1,22,78,429

 1,37,46,000

11.95%

21

 1,36,23,487

 1,53,60,600

12.75%

22

 1,50,89,601

 1,71,36,660

13.57%

23

 1,66,87,665

 1,90,90,326

14.40%

24

 1,84,29,555

 2,12,39,358

15.25%

25

 2,03,28,215

 2,36,03,294

16.11%

26

 2,23,97,754

 2,62,03,624

16.99%

27

 2,46,53,552

 2,90,63,986

17.89%

28

 2,71,12,372

 3,22,10,385

18.80%

29

 2,97,92,486

 3,56,71,423

19.73%

30

 3,27,13,809

 3,94,78,565

20.68%

As can be seen, after 30 years, there is a significant difference of 20%. Not a small thing to ignore!

 

How to invest in direct plans?

A few years back, it was quite difficult process to get the mutual fund forms, fill them up, submit them with the cheques, ensuring that the KYC is done etc. But today there are number of platforms which make direct plan investing a piece of cake. One can always use the online interface of the respective mutual fund AMC to invest in direct plans. If you wish to invest in multiple fund houses from a single platform, you could use MFUtilities, Kuvera, Grow, Investza, Paytm Money to name a few.

SEBI Registered Investment Advisers

In 2013 when SEBI created the regulation for Direct plans, they had also thought about how the investors will get investment advice. They also created a new set of advisers called as SEBI registered Investment advisers. These are advisers who cannot receive any commissions from mutual fund houses. They charge a fee to advise clients. They act as fiduciaries and help investors invest in funds suited to their individual goals based on their risk profile.

I am glad to hear from you

%d bloggers like this: