Ten months ago, when the Rs. 8.07 lakh crore Indian mutual funds (MFs) industry started offering direct plans across MF houses and their schemes, it offered a cheaper way to those of us who wanted to invest in MFs without a distributor’s help. Though it’s a bit too soon to ascertain its success, the direct plan has started to make an impact.
As per data provided by Value Research, a MF tracking firm, institutional investors have shifted their money to direct plans. The small retail investor hasn’t yet shifted to direct plans, but the move has started; those who are aware of the facility have started to move already.
The percentage of corpus in direct plans of liquid and ultra short-term schemes (these are the schemes where institutional investors such as large companies and banks invest) to the overall money that’s there in these schemes have gone up from 34% at the end of March 2013 to 46% in June 2013 and 45% in September 2013. The corpus in these schemes’ direct plans grew from Rs. 1.05 lakh crore to Rs. 1.24 lakh crore in the same period.
Retail investors haven’t quite warmed up to direct plans yet. Equity funds — where retail investors typically invest—have seen the corpus of their direct plans grow from Rs. 2,063 crore in March 2013 to about Rs. 3,400 crore in September 2013. The corpuses that lie in direct plans of equity funds constitute just 1-2% of the overall equity funds’ corpus. “I think as a proportion, direct plans have definitely risen, but it’s been more in the institutional segment compared with the retail segment,” said Saurabh Nanavati, CEO, Religare Invesco Asset Management Co Ltd.
One reason, some fund insiders say, why direct plans in equity funds haven’t really taken off is lack of awareness. “Some high net worth individuals have also come into direct plans of ultra short-term schemes and short-term bond funds. But retail investors are completely ignorant about the direct plan. The challenge is how to reach out to them. Distributors earn through trail fees, so it’s obviously not in their best interest to educate customers about direct plans,” said Rajan Ghotgalkar, MD, Principal PNB Asset Management Co Ltd.
It’s a different story in the case of large investors though. Treasuries of large companies and banks have been known to invest Rs. 50-100 crore and upwards in liquid funds on a daily basis. A back of the envelope calculation shows that a firm that invests, say, Rs. 100 crore in a liquid fund for a week that earns 8% annualised returns stands to save roughly about Rs. 18,000 in just a week by investing in a direct plan. If the same money stays invested for 15 days, the firm saves a little over rs. 38,000 in just a fortnight.
But retail investors put in smaller sums. If you invest Rs. 1 lakh in an equity fund that earns you about 20% compounded returns in 10 years, you would save about Rs. 36,000 by investing in a direct plan over 10 years or about Rs. 3,600 a year. Also, Rs. 1 lakh invested in a bond fund that earns you 12% compound interest over a period of 10 years would result in a savings of about Rs. 12,000 over 10 years or about Rs. 1,200 a year if you invest in a direct plan. These are rough numbers; your savings depend on market movements and how long you stay invested.
What should you do?
If you follow Mint50 (Mint’s chosen set of 50 MF schemes) closely, then the direct plan is meant for you. Since direct plans aren’t even a year old, the difference in returns given out by direct plans and regular plans is negligible. But over a period of time, the difference will widen.
The downside here is that you need to go to each fund house’s website and invest. But that’s just a one-time exercise though; systematic investment plans are automated and you can get consolidated account statements from your R&T’s website. If you aren’t comfortable using the Internet or want the convenience to invest across all MFs through an online portal such as FundsIndia.com or Fundsupermart.com (they offer only regular plans) or want your distributor to invest on your behalf in case you insist he or she tracks your investments regularly, stick to regular plans.