- Date : 08/01/2023
- Read: 5 mins
Direct mutual fund investment schemes completed 10 years on January 1, 2023. What is it? How is it different from regular plans? What was the journey of growth like?
Do you know the direct mutual fund investment schemes have turned ten years on January 1, 2023? A direct mutual fund reduces your cost of investment. Though it is more cost effective than a regular plan, it may only benefit some.
Suppose you are a novice in mutual fund investing or need handholding to navigate the volatile market. In that case, investing in a regular plan is more suitable. If you can choose the right mutual fund to maximize your investment return, choosing a direct mutual fund is always better.
Before going deeper into what we learned in the last 10 years regarding mutual fund direct plans, let's first try to understand what direct and regular plans are in a mutual fund.
Direct Mutual Fund vs Regular Mutual Fund: Basics Explained
What is a Regular Mutual Fund?
It is called a regular plan when you buy a mutual fund scheme through an agent or a distributor. You have to pay a distribution commission when you buy it through an agent or a distributor.
What is a Direct Mutual Plan?
It is called a direct mutual fund investment when you purchase a mutual fund directly from a fund house (say, Nippon India Mutual Fund or HDFC Mutual Fund). You don't have to pay a distribution commission for this investment.
Regular vs Direct Mutual Fund Investment
The expense ratio is the major difference between regular and direct mutual fund investments. It is the total expense of a fund concerning its AUM (Asset under Management). The expense ratio keeps recurring, and your mutual fund scheme bears it. A mutual fund's direct plan has a lower expense ratio than that of a regular mutual fund plan.
If you opt for a regular plan, the payments made by the fund house to the advisor or mutual fund agent/distributor will be deducted from your investment money. However, in the case of direct plans, no commission is charged. That's why a direct mutual fund's expense ratio is lower than a regular plan's.
Suppose a mutual fund company charges a 0.5% expense ratio. This means that the fund house will use 0.5% of the mutual fund's total assets under management to pay for the fund's administrative and operating costs.
If you check the expense ratio of the last five to ten years, the average expense ratio (as of September 21, 2021) of:
- The direct plan is 0.46%
- The regular plan is 1.58%
The expense ratio of direct mutual funds are usually 0.5-to-2% lower than the regular plans. This is because in direct plans, you are not paying any broker/distributor fee. At a glance, 0.5-to-2% difference in the total expense ration may seem low. But it affects your return on investment (ROI) significantly. People who make direct mutual fund investment, always get a higher CAGR return (Compound Annual Growth Rate) than the regular plan.
Suppose, there are two persons: A and B.
- Person A has been investing ₹ 10,000 every month in a equity mutual fund through a direct plan in the last 10 years. In these ten years, person A will be able to create a corpus of ₹ 28.1 lakh till now.
- Person B has been investing ₹ 10,000 every month in a equity mutual fund through a regular plan in the last 10 years. In these ten years, person B will be able to create a corpus of ₹ 26.6 lakh till now.
If we compare the two investments, we will see that person B (who invested through regular plan) will be able to create a corpus that is around ₹1.5 lakh less than person A (who invested through direct mutual fund plan).
This is why a direct mutual fund scheme's NAV (Net Asset Value) is higher than that of a regular scheme. Check this if you want to learn more about choosing between a regular and direct mutual fund.
Direct Mutual Fund: A Brief Account of the 10-Year Journey
As per one of the biggest reforms in the Indian mutual fund market, the fund houses launched the first-ever mutual fund direct plans on January 1, 2013. This reform helped the mutual fund investors save around:
- 0.5% to 1% every year on equity mutual funds
- 0.1% to 0.5% every year on debt mutual funds
When these savings are calculated over a long time, it adds up to a large amount. As of April 2022, the total mutual fund direct plan accounts for 16.94 trillion, which is around 45% of the ₹ 40 trillion Indian Mutual Fund market.
Value Research CEO, Dhirendra Kumar, has said that investing has become very popular mainly because of the direct mutual fund plans, online banking, fintechs, and Jan-Dhan program.
According to his estimates, direct mutual fund investment accounts for 1% of the total investments yearly.
The higher uptick for mutual fund direct plans can be attributed largely to online mutual fund platforms and other financial technology players.
SEBI data shows that the total number of unique investors in mutual funds (MFs) has increased by around 20.5% in just 1.5 years. Between March 31, 2020, and October 31, 2021, the total number of unique investors investing in MFs jumped by 6 million (from 29.2 million to 35.2 million).
Zerodha's assistant vice president-business, Bhuvanesh R, believes that online platforms have worked as a major catalyst to popularize direct mutual fund schemes. This is mainly because of their effort of educating users how opting direct plans can save them money.
A direct mutual fund investment may generate a return of around 1-2% more than the mutual fund's regular plans.