The debate about direct v/s regular is not new and is mostly focused on two key factors: cost and returns. However, both these factors are interrelated. The difference in TER (total expense ratio) of a regular and a direct plan can range from 0.5% to 2%. Since the direct schemes do not pay commission and marketing expenses, their expense ratio is lower. This directly impacts the returns from these plans. If the TER of a regular plan is 0.75% more than that of a direct plan, then the direct plan will give that much higher CAGR return than the regular plan.
For many new investors, this difference in returns is attractive. Mutual fund advisors say that investors should understand that it is good that they are saving money on expenses but both the plans of a scheme are run similarly. Even though the difference in returns ranges in 1-2% range, this small difference makes a big amount in the long term. According to a study by ET Money, a systematic investment plan of Rs 10,000 every month in equity funds, on an average, done directly in the past 10 years would have accumulated a corpus of Rs 28.1 lakh. In comparison, the same investments in the fund’s regular plan would have garnered Rs 26.6 lakh in regular plans, which is Rs 1.5 lakh less.
If an investor puts a lumpsum of Rs 1 lakh in direct equity funds about 10 years ago, the investment would have swelled to an average Rs 23.09 lakh. In the regular plan, the investment would have grown to Rs 21 lakh. The difference would have been Rs 2.09 lakh or 10%. The funds in the hybrid and debt categories, too, created an excess wealth of 6% and 3% for SIP and 11% and 6% for lumpsum investment respectively, according to the study.
Mutual fund experts say that the increase in direct investments is a good thing but comes with its own challenges.
“Investors who understand how to select the right mutual funds, create their portfolios and monitor it regularly based on their goal, risk appetite, time horizon and asset allocation and who understand the dynamics of the markets can venture in direct plans. However, this is not how many investors think. There are so many investors out there especially in tier 2-3 towns and in villages who do not understand mutual funds and markets, but have access to online direct platforms. Just because the process of starting an investment online is so easy, doesn’t mean you will do it right. There are a lot of challenges in this journey and if you are not an aware investor, you can lose your money. To save on 1-2% fees / commission, investors can end up losing not only the returns but can end up losing their capital as well. Thus in my view having the right advisor / distributors just like having a family doctor is very important especially for new investors,” says Rushabh Desai, founder of Rupee with Rushabh Investment Services.
Direct investing in mutual funds started in 2013 but according to analysts, the plans have gotten the fame and limelight in the last five years. In the last few years, especially after demonetisation, many new investors ventured into mutual funds on their own. We call them the DIY investors. The awareness about direct investing has been brought majorly by the fintech platforms that sell mutual funds online. Platforms like Groww, Kuvera and ET Money let investors invest in direct plans of mutual funds without any added expenses. Experts say that fintechs have made direct investments easy and accessible to a much larger audience in India.
Gaurav Rastogi, CEO, Kuvera, a popular online wealth management platform, says that new-age fintechs are making mutual fund investments easier and hence the penetration of direct plans is increasing. “Fintechs have led the way to make investors aware of the direct investing model in the last couple of years. If India has to become equity-oriented, there are two important things we have to achieve- low cost and low friction. This is what fintechs are doing. Direct plans are low cost options to invest in mutual funds and online platforms provide these direct plans to retail investors with ease. Contrary to general belief, data suggests that 70% of the investors that come to Kuvera are long-term investors who invest via SIP. There is no data that proves that there is more churn in direct investment compared to regular plans,” says Rastogi.
