Benefits of Investing in Direct Plans of Mutual Fund Schemes

0
With the advent of January 2013, several AMC has come up with Direct Plans in Mutual Fund Schemes as per the SEBI Guidelines, which offers several leverages to investors.
 

Advantages of Investing in MF Schemes Direct Plans

  • With Direct Plans investors can Directly Invest in Mutual Funds schemes i.e. without involving any intermediary in between the transaction.
  • Also, Direct Plans offers low expense ratio as compared to Regular Plans, where the later gives both upfront and trail commission to the Intermediary, thus costs to the investor.
  • Further, with Direct Plans investors, can leverage more returns on their investments in the long run thus, enjoy more compounding benefits.
  • While Regular Plans charges 50-75 bps extra for the transaction through distributors, Direct Plans offers investor to get rid of such charges.
  • As investments in mutual funds are subject to market risk, thus led investor’s to analyze & invest in any of the MF Scheme (Increases Transparency) which suits to their need which was not possible in Distributor’s led Regular Plans.
  • In addition, an investment made through MF Distributor is limited due to their empanelment with Specific Fund Houses which led Direct Plan more attractive to the investor to select schemes of their choice of scheme and risk.
  • As, there is a little percentage difference in regular and direct plans but in the long-term, it affects investor’s return capability. 
 

Let’s understand with an example:

Mr. Chandu has invested Rs. 30 Lac as Lump-Sum directly XYZ MF Equity Scheme – Direct Plan (Expense Ratio -1 %), whereas Mr. Sharma has invested the same amount through his MF Distributor in the same scheme but in Regular Plan (Expense Ratio -2.5%).

  • After 10 years, the Mr. Chandu gets Rs. 1.68 Crore i.e. 18.80% annualized return whereas Mr. Sharma gets Rs. 1.45 Crore only i.e. 17.00% annualized return for making an investment in Regular Plans, thus paying Rs. 23.00 Lakhs as commission to the distributor.

Besides, low expense ratio and higher returns in direct plans, Investors, who live outside the country (i.e. NRIs/other Residents) needs to contact their distributor to invest in MF Schemes which increases either their cost due to the availability & time issues of either parties or the accessibility of the distributor. 

In addition, with the direct plans, an investor from anywhere in the world with a good internet connection can invest directly in MF scheme of their choice with just a click of a button.

Furthermore, it also enhances Financial Literacy among themselves on the advantages and disadvantages of the MF Scheme which was not possible with Distributor’s led Regular Plans.

Thus, investing in direct plan benefits investor to not only save money in the long-run but also allows them to invest directly in the MF scheme of their choice within their reach and knowledge.

Besides advantages, there are some possible disadvantages of Investing in Direct Plans of Mutual Funds.
 

Disadvantages of Investing in Direct Plans of Mutual Fund Schemes

  • Lack of Knowledge: Due to availability of Large junk of Data over the Internet, it becomes really difficult for the investors to authenticate which tools to use to identify optimal MF Schemes.
  • Amateur Decision: Today, most of the investors are very well versed with the ‘Definition of Mutual Funds‘ – All Credits goes to AMFI & its “MUTUAL FUNDS SAHI HAI” campaign. But still, the selection of any MF Scheme is still a question for lots of investors which led to bad investment decisions.
  • Reduces Cost, but Increases Confusion: Mutual Funds Direct Plans are know for its Low Expense Ratio and High Returns in long-term but most investor are confused with the different varieties of MF Schemes like Multi-Cap Fund, Blue-Chip Fund, Tax-Saver Fund, Small-Cap Fund, Balanced Fund, Arbitrage Fund, Etc. All these funds have their in-build benefits which no-doubt helpful for investors but still the awareness lacks.
 

Conclusion

Direct Plans in Mutual Fund Schemes are itself an Golden Opportunity for lots of Retail Investors to create wealth in the Long-term but needs to be promoted well by the AMC, AMFI and other Professionals.

Besides promotion, their is an optimal solution which can hinders all the disadvantages of Investing in Direct Plans of Mutual Funds Schemes is through the Consultation from the Fee-Only Financial Planner.

Thanks to SEBI and FPSB Ltd. India Board for educating advisers towards the business model of charging Fees only from the clients. Now, the entire ball game is up to the retail whether to educate themselves or Hire a Professional whose advice is unbiased and charges only fee from the client irrespective of considering a commission over their Invested amount.

If you are looking for unbiased Financial Advice, then opt for our Basic I-Financial Plan.

[review position="bottom"]
Share.

Comments are closed.