Direct plans of MFs ideal for long-term investment
Jan 17 2013
History: In 2012, the market regulator Securities and Exchange Board of India (Sebi) mandated that mutual fund houses should launch a separate plan called a direct plan for all those investors who do not use the service of a distributor. This is important in the sense that there are a lot of people who do not wish to use the services of any intermediary and, hence would like to ensure that they get a different situation over a normal investor.
The logic behind the move is that the mutual fund pays a commission to the distributor from the corpus of the fund, so investors who do not use such services should not be bearing the same expense.
Benefit: There is a clear benefit available to investors in considering a direct plan. The benefit is in the form of a lower expense ratio and, hence, this is something that investors should consider as a part of their evaluation process.
The non-payment of commission in the plan is reflected in the lower expense ratio that the scheme will charge investors and, hence, they will be able to get a higher return on the investment with the same performance from the fund. The manner in which this will work out is that the lower expense ratio adjusted in the net asset value of the fund would lead to a situation where the returns that are generated would turn out to be higher.
Operation: Mutual funds have launched direct plans for investors who do not use the service of any intermediary. Investors can choose to make their investment in these plans when they undertake their investment effort. They can also shift their existing investment to a direct plan. There seems to be an element of vagueness in terms of quantifying the actual benefits of direct plans, but what is clear is that the expense here will be lower because even the annual recurring commission will be eliminated. It is only after some time has passed that the actual difference of the lower cost will be visible.
This will be in effect when you make a direct investment with a fund house or make an online investment or investing with the funds registrar. Investors can also switch from an existing plan to a direct plan, but they might end up paying the exit load that comes along with the original investment.
It is important that investors who are able to make their own decisions about the choice of a specific fund and at the same time are able to complete the process on their own should be using this route. This route is effective for those who are going to invest over the longer term and for these investors even a small amount means a lot.
(The writer is a CA and certified financial planner)