- Date : 07/03/2023
- Read: 5 mins
Since their launch, in the last 10 years, direct plans have gained around 45% market share. We find out why are they so popular and whether they will race ahead of regular plans in the next few years.
On 1st January 2013, SEBI introduced direct plans for mutual funds. These plans allowed investors to invest in mutual fund schemes at a low cost without the involvement of intermediaries. On 1st January 2023, direct plans completed 10 years. In this article, we will understand what direct plans are, their benefits, and how have they fared in the last 10 years.
What is a direct mutual fund?
A direct mutual fund allows the investor to invest directly in a scheme without the help of an intermediary. Since there is no intermediary involved, there is no commission required to be paid. As a result, the expense ratio of a direct plan is lower than a regular plan.
The Net Asset Value (NAV) of a direct plan is always higher than that of a regular plan. You can invest in a direct plan either through the AMC website or by visiting the mutual fund house office or the registrar’s office. You can invest in direct mutual funds through some third-party platforms like Kuvera, Zerodha Coin, Groww, Paytm Money, etc., that allow you to invest in direct plans of mutual funds. However, these platforms don’t get paid any commissions from the AMCs when you invest in direct plans through these platforms.
What is the benefit of investing in direct mutual funds?
The biggest benefit of a direct mutual fund is the low expense ratio. The difference in the expense ratio of a direct fund and a regular fund can range from 0.5% to 2%. While this difference may seem small, over the long term, it can result in a significant difference in the corpus that you will accumulate.
Recently, direct funds completed 10 years since their launch. ET Money researched how did the returns of direct plans fare in comparison with those of regular plans. Here are the results.
1) SIP returns: An individual started a systematic investment plan (SIP) of Rs. 10,000 each in an equity, debt, and hybrid scheme during these 10 years. The returns from the direct plan were higher by Rs. 5.4 lakhs (6.4%) than the regular plan.
2) Lump sum investment returns: An individual invested Rs. 5 lakhs lump sum in the direct plans of each of these 3 (equity, debt, and hybrid) schemes. The total lump sum investment is Rs. 15 lakhs. The returns from the direct plan were higher by Rs. 7.9 lakhs (10.3%) than the regular plan.
Returns comparison: Direct plans vs regular plans
As seen in the above image, the returns from direct plans have been higher than regular plans for SIP as well as lump sum investments.
How has been the adoption of direct funds in the last 10 years
Let us now look at some data related to the adoption of direct funds in the last 10 years. In the last few years, many investors have started going for direct plans. As a result, the share of direct plans has been steadily increasing, and that of regular plans has been going down. However, on an overall basis, regular plans still have a higher percentage than direct plans.
Chart: Percentage of direct plans vs regular plans
The above chart shows that as of November 2022, around 45% of the people have been investing in direct plans, and around 55% of the people have been investing through distributors. Since the introduction of direct plans in 2013, they gained market share for the first few years. However, in the last two years, more people have started investing through distributors.
Chart: Aum break-up of direct plans vs regular plans
As seen in the above chart, as of November 2022, the Assets Under Management (AUM) for direct plans were around Rs. 18 lakh crores, and for regular plans were a little above Rs. 22 lakh crores.
As more and more people shift to direct plans from regular plans, the AUM of direct plans may exceed that of regular plans in the next few years.
Switching from regular plans to direct plans
Do you already have investments in regular plans and are looking to direct plans? If yes, do keep in mind that there will be capital gain tax implications for shifting. When you shift from regular plans, you will have to redeem the units and reinvest in direct plans. The redemption from regular plans will give rise to capital gain tax, either short or long-term capital gains tax, depending on the holding period.
When you invest the proceeds in a direct plan, it will be considered a fresh investment. So, the holding period will start afresh. Also, be mindful of the lock-in period and the exit load, if any.
Direct plans vs regular plans: Which one should you opt for?
If you are new to mutual fund investing, it is recommended that you approach a Mutual Fund Distributor (MFD) who can do your need analysis and risk assessment and accordingly make a financial plan for you. If you don’t want to pay the MFD commission, you may approach a fee-only financial advisor. They will recommend mutual fund schemes, and accordingly, you can invest in direct plans.
If you have good knowledge of mutual funds and have been investing in them for some time, you may go for direct funds.
Whether you choose to go for an MFD and invest in regular plans or invest in direct plans, your aim should be to achieve your financial goals and attain financial independence. Here are 6 Best apps to invest in Direct Mutual Funds.