From 1st of January, 2013 you have the option of investing in the Direct Plan option of any of the existing schemes of mutual funds.
What does that mean?

Basically as the word direct implies, under this option you deal directly with a mutual fund without any intermediary or third party like a distributor, agent, financial planner, bank, online broker or a portal. So you do this in any of the following three ways:

  • Submit your application at the fund house branch office and ensure that your form does not have the distributor ARN code but instead has direct written in the prescribed box
  •  Register with the fund houses own portal and invest through it
  •  Or submit your applications at registrars of fund houses such as CAMS and Karvy, again ensuring that you have mentioned direct and not a distributor ARN code.

Prior to January 2013 too this was possible however there wasnt any benefit to the investor in doing so. But now there is an advantage in investing through a Direct Plan.
Before we look into what this advantage is and how it impacts you as an investor, you need to understand the commission structure on which distributors of mutual funds work.
Originally, till a few years ago, when you made an investment of Rs.100 into a mutual fund, between Rs.1 to Rs.2.50 used to be deducted as an entry load. This entry load was primarily the commission that was paid to the intermediary you went through to invest in this mutual fund – your distributor, agent, online portal, financial advisor, bank etc. So in effect you were actually putting in only Rs.97.50 to Rs.99 into the mutual fund.
In 2007, SEBI – Securities and Exchange Board of India, the marker regulator cum watch dog,made a distinction between investments made through distributors and investments directly and did not allow mutual funds to charge entry loads on direct investments. Therefore for the same amount of money, for the same NAV, if you were to invest through a distributor you would pick up a fewer units of the mutual fund when compared to investing directly with the mutual fund.
However from August 1st, 2009, SEBI abolished entry loads for all mutual funds. While the commission by itself was not the problem, the reason for this move was the practises being followed by a number of intermediaries/agents in pursuit of this commission. As your agent/advisor was being paid on every sale, his motivation would be to make you constantly buy more mutual funds and this would be possible by churning your portfolio. On his recommendation, an investor would buy some units of a mutual fund today, sell them after some time, buy another mutual fund, sell that too after some time and so on; so that the agent/advisor/distributor keeps earning commission. Further as the commission was different for different schemes of mutual fund, it was quite common to see the agent community advising schemes with higher commission to investors over other schemes, irrespective of whether the scheme was any good for the investor or suited his requirements or not.
To curb this mis­selling, entry loads were abolished in the interest of the investor so that when you invest Rs.100 into a mutual fund, you get units worth Rs.100. Irrespective of whether you are invested through a distributor or directly, you get the same number of units of the mutual fund at the same NAV.
Now in the present scenario under the Direct Plan option, this will change. Following from the logic that a mutual fund company spends less or incurs less expense on direct investments vs investments through distributors where there are expenses like brokerage and commission and therefore has savings on direct investments. Hence these savings that a fund company derives from spending less on direct investors must be passed on to the investors by not deducting it from their NAVs. This will mean that direct investors will now get a different, higher NAV and will thus have to be placed in a separate plan of the fund.

So what are the advantages under the Direct Plan?

Expenses are likely to be lower by 0.5% to 1% per year for equity funds which means returns will be that much higher. Say, Mr. M invested Rs.1,00,000 in an equity funds Direct Plan which gives her a return of 12% p.a. over 10 years. This would amount to Rs.3,10,585 after ten years.Mr.Y also invests Rs.100,000 in the same mutual fund scheme but opted to do this trough her agent i.e a regular plan. Since the regular plan will have expenses that are higher by about 0.5%, the returns per year would fall to 11.5 % p.a. thus Mr. Y investment would amount to Rs.296,995 after 10 years, 4.38% less than Mr. Ms investment.
Had this investment been in a debt or liquid fund instead of an equity one, the difference between Mr. Ms and Mr. Ys investment would be much lower as trail or recurring commissions paid to distributors on debt funds is much lower and hence the average difference is likely to be only about 0.05% to 0.50%.
So when you are talking of an equity investment that is long term and a large amount, a direct plan make sense. Further commissions may rise in the near future now that SEBI has recently made expense ratios fungible. Hence if this happens, the differential between Direct Plans and regular plans could widen.

But the catch is…You dont have the expertise and experience of the advisor/agent to rely on for an appropriate and suitable selection of the mutual fund schemes. The difference in returns of a scheme that is in the Top 10 in its category and one that is say even the 17th or 18th can be large. So if you go the Direct Plan route you will need to equip yourself with the knowledge to understand how mutual funds work, how the share market is doing, evaluate track records of fund houses and fund managers and most of all you will need to have the time to devote to research to be able to invest well.
A Direct Plan will work well for an investor who knows what he/she wants and has the required knowledge and infrastructure to deal with various mutual fund houses for her portfolio.
The Future… Investing made easier

Though direct plans are cheaper, investors need to assess first whether they are capable of handling their own investments or they need advice. If the investor is capable of managing his investment, it makes sense to go for direct plans. Investors on direct plans can also take the help of SEBI­ registered investment advisors (RIAs) by paying a fee.
RIAs usually advise on financial planning and mutual funds. The execution is left to the investors. However, investing in direct plans has become a lot easier —no longer do you have to go the the mutual fund office—due to the launch of several online portals— dedicated to direct plans. Association of Mutual Funds in India ( AMFI)­ sponsored Mutual Fund Utilities (MFU) also allow investors to purchase direct plans through them. Even for direct plan investors who need handholding at the execution stage, things have become easier. MFUs also allow the RIAs to enter investment details on behalf of their customers, if the customer wants it.
As we move on the change from a commission based model to a fee based model is inevitable as in developed economies of the world. At some stage while you invest directly in a mutual fund without any intermediaries, you will be doing so on the recommendation of a financial planner/advisor and paying a fee for his services.

The Author is SEBI Registered RIA and can be contacted on
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