What would you do if I were to tell you that you can earn more in the same MF scheme (that you are currently investing in) simply by changing the way you invest? Surprised? It’s true…so, let’s find out more.
Direct and Regular Plans of Mutual Fund Schemes
There are two broad ways in which you can invest in mutual funds. Through a distributor (regular plan) or directly with the AMC (direct plan). For every MF scheme, there are two plans available, viz. direct plan and regular plan. For instance, you can invest in HDFC Balanced Fund-Direct plan or HDFC Balanced Fund-Regular plan.
What Is the Difference Between Regular and Direct Plans of the Same Scheme?
The only difference is distributor commission. Everything else including the portfolio and fund manager is same across the two types of plans.
Under regular plans, since you are going through a distributor, there is a cost attached to it. Asset management company (AMC or the mutual fund house) pays commission to the distributor on your behalf. You do not have to pay the Asset Management Company (AMC) directly. AMC pays the distributor but money comes from your investment. Since a part of your investment is going towards distributor commission, it affects your returns.
Under direct plans, you invest directly with the fund house. Recently, a few online portals have come up which let you invest in direct plans of MF schemes. Since there is no distributor involved, there is no commission to be paid. And that adds to the return.
How Do I Know If I Am Investing in Regular or Direct Plans?
Regular plans are the norm. Direct plans were launched quite recently in January, 2013 only.
You are investing in regular plans if:
- You are investing through a local distributor.
- You are investing through a bank branch.
- You are investing through online portals such as ICICIDirect or FundsIndia.
Alternatively, you can download your account statement from AMC website or CAMS or Karvy website. You will have “Reg” mentioned in front of regular plan investments and “Direct” in front of your Direct plan investments.
Points to Note
NAV of Direct plan of a scheme is higher than NAV of regular plan of the same scheme. However, that does not mean direct plans are expensive. NAV of direct plan is higher than regular plan because direct plan offers better return. NAV of direct plan and regular plan started at the same level on January 1, 2013. NAV of direct plans have inched ahead since then due to better returns. The gap will only grow over a period of time. Direct plan of a MF scheme will always give better returns than regular plan of the same MF scheme. It is a mathematical construct.
What Is the Difference in Returns?
Difference in returns will be due to the commission paid to the distributors. Difference will vary across schemes. You can expect difference to be higher in equity funds than debt funds. Typically, it ranges from 0.5% to 1.25% p.a. in an equity fund. This difference may seem small. However, it will lead to a huge difference in portfolio value over the long term because of compounding of returns.
This is best explained with the help of an illustration. Direct plans were launched in January 2013. I have picked up a few good funds across categories and see the difference in return between January 1, 2013 and June 30, 2016. I have considered difference in returns for both SIP and lump sum investments. I will subsequently extrapolate this difference in performance over the long term.
| Fund Scheme | Fund Type | 1-Jan-2013 | 30-Jun-2016 | ||||||
| Common NAV | Direct Plan | Regular Plan | |||||||
| NAV | Return | NAV | Return | ||||||
| Birla Sunlife Frontline Equity Fund | Large Cap | 100.24 | 174.6 | 17.18% | 169.3 | 16.16% | |||
| HDFC Balanced Fund | Balanced | 64.37 | 116.7 | 18.52% | 113.6 | 17.61% | |||
| ICICI Prudential Value Discovery Fund | Multi-cap | 58.04 | 123.8 | 24.15% | 119.9 | 23.03% | |||
| Axis Long Term Equity Fund | Tax Saving | 14.91 | 32.83 | 25.30% | 31.49 | 23.81% | |||
| Mirae Asset Emerging BlueChip Fund | Mid & Small Cap | 14.02 | 34.9 | 29.77% | 33.7 | 28.48% | |||
| Tata Money Market Fund | Liquid Fund | 1805.89 | 2435 | 8.91% | 2427 | 8.82% | |||
| Birla Sunlife Short Term Fund | Short TermDebt Fund | 42.52 | 58.37 | 9.47% | 58.16 | 9.36% | |||
| Birla Sunlife Treasury Optimizer Fund | Income Fund | 137.46 | 194.9 | 10.49% | 193.4 | 10.24% | |||
| Fund Scheme | Lump Sum Investment Rs 1 lac investment on January 1, 2013 grows to (As on June 30, 2016) | SIP Investment SIP of Rs 10,000 per month on 1st of every month grows to (As on June 30, 2016) | ||||||
| Direct Plan (Rs lacs) | Regular Plan (Rs lacs) | Difference (Rs) | Direct Plan (Rs lacs) | Regular Plan (Rs lacs) | Difference (Rs) | |||
| Birla Sunlife Frontline Equity Fund | 1.74 | 1.69 | 5,257 | 5.66 | 5.56 | 10,298 | ||
| HDFC Balanced Fund | 1.81 | 1.76 | 4,816 | 5.84 | 5.73 | 10,353 | ||
| ICICI Prudential Value Discovery Fund | 2.13 | 2.07 | 6,685 | 6.51 | 6.38 | 13,508 | ||
| Axis Long Term Equity Fund | 2.20 | 2.11 | 8,987 | 6.33 | 6.17 | 15,739 | ||
| Mirae Asset Emerging BlueChip Fund | 2.49 | 2.40 | 8,559 | 7.32 | 7.17 | 14,971 | ||
| Tata Money Market Fund | 1.35 | 1.34 | 419 | 4.89 | 4.89 | 675 | ||
| Birla Sunlife Short Term Fund | 1.37 | 1.37 | 494 | 4.97 | 4.96 | 940 | ||
| Birla Sunlife Treasury Optimizer Fund | 1.42 | 1.41 | 1,106 | 5.05 | 5.02 | 2,590 | ||
| Fund Scheme | XIRR | Value of SIP investment in 15 years (Rs lacs) | |||||
| Direct Plan | Regular Plan | Direct Plan | Regular Plan | Difference | |||
| Birla Sunlife Frontline Equity Fund | 17.26% | 16.16% | 75.07 | 68.19 | 6.89 | ||
| HDFC Balanced Fund | 19.14% | 18.06% | 88.56 | 80.53 | 8.03 | ||
| ICICI Prudential Value Discovery Fund | 25.84% | 24.54% | 160.38 | 142.88 | 17.50 | ||
| Axis Long Term Equity Fund | 24.06% | 22.51% | 136.92 | 119.32 | 17.60 | ||
| Mirae Asset Emerging BlueChip Fund | 33.24% | 31.92% | 309.12 | 275.08 | 34.04 | ||
| Tata Money Market Fund | 8.67% | 8.59% | 35.92 | 35.69 | 0.24 | ||
| Birla Sunlife Short Term Fund | 9.59% | 9.48% | 38.80 | 38.44 | 0.36 | ||
| Birla Sunlife Treasury Optimizer Fund | 10.49% | 10.19% | 41.86 | 40.81 | 1.05 | ||
You can see the difference in accumulated corpus in direct and regular plans for a SIP of 15 years. It is huge. The amazing part is you do not have to take any additional risk. You can earn more by simply bypassing the intermediary.
Can I Switch from Regular Plan to Direct Plan?
Yes, you can. For instance, you can switch your investments in HDFC Balanced Fund-Regular plan to HDFC Balanced Fund-Direct plan. However, do note switch from regular to direct plan is equivalent to redemption from regular plan of MF scheme and subsequent investment in direct plan of MF scheme. Hence, capital gains tax and exit load implication will arise at the time of redemption. Exit load refers to the penalty charged by AMC if you redeem your investment too soon. Typically, AMCs charge exit load of 1% if you exit your investment in equity mutual fund before 1 year. Short term capital gains (<=1 year) on equity funds are taxed at 15% while long term capital gains are exempt from tax. Short term capital gains (<=3 years) on debt funds are taxed at marginal income tax rate while long term capital gains are taxed at 20% less indexation. If you are planning to switch, do keep this aspect in mind.
Here is what you can do:
- Make fresh investments only in direct plans.
- You can also stop your existing SIPs in regular plans and start new SIPs in direct plans.
- For the existing investments in regular plans, you can wait for 1 year in equity funds (till investment completes 1 year) and 3 years in case of debt funds before making the switch. In such case, you will tide over capital gains tax and exit load issues.
How can I invest in Direct plans of MF schemes?
You can visit branches of AMCs or CAMS or Karvy offices to invest in direct plans. You can also register on individual AMC websites to invest in direct plans. However, you will have to remember login credentials for every AMC website. Recently, many online portals have come up that let you invest in direct plans from multiple AMCs. If you register with them, you can invest in schemes from multiple AMCs from a single interface. A few examples are Invezta, OroWealth, UnoVest etc. All these portals charge either a flat fee or a percentage of assets for the service offered. Still, these will be less expensive than regular plans.
And yes, there is MF Utility. MF Utility is an initiative by 25 AMCs. You can register with MFUtility and invest in direct plans online. The service is free of cost. Go through this post to know more about how to register with MF Utility.
What should you do?
It makes sense to invest in direct plans of MF schemes. You must also shift your investments in regular plans to direct plans. There is a caveat though. Direct plans are more suited to Do-it-yourself (DIY)investors, who can research mutual funds and assess fund suitability on their own. Such investors can review and rebalance their portfolios themselves. It makes little sense for such investors to stick with regular plans. DIY investors must shift to direct plans. There are many of us who do everything on own but still invest in regular plans (say through online platforms such as ICICIDirect). It is criminal waste of money for such investors to invest in regular plans.
If you can’t do that, you can contact a SEBI Registered Investment Adviser (SEBI RIA). Such advisors charge a fee and recommend funds based on your requirements. You can subsequently invest in direct plans of MF schemes. If you don’t want to pay fee either (and yes, many don’t want to write a cheque), then you are better off sticking to a local distributor or a robo-advisory platform. In my opinion, cost of selecting the wrong fund and poor investment discipline is much more than 0.5%-1% p.a.