There is a popular misconception that Direct Plans do not entail any costs. That is not the case. In case of Direct Plans, the costs are partially reduced since the marketing costs do not exist as the investors directly approach the fund AMCs. Here are 4 things you must know:
- Since there is no entry load allowed now, the fund charges the regular investors for the market and outreach expenses. That is normally around 1 % of the AUM. However, the entire 1 % is not passed on as benefit to the Direct Plan holders. They get a benefit of around 0.60 % after common allocations.
- Exit loads will continue to apply for Direct Plans and the Regular Plans since it is based on your holding period. That means, if you do not honour the minimum holding period, then you are charged exit load even if you are invested in a direct plan.
- The total expense ratio (TER) of the Direct Plan is around 60-70 basis points lower compared to the Regular Plan. This lower cost translates into a higher NAV and therefore higher returns for the Direct Plan. The illustration of Franklin Templeton gives a rough idea of the advantage that you can get in a Direct Plan over a 5 year period.
- The TER of the fund consists of a variety of costs like marketing & distribution costs, registry costs, audit costs, custodial charges, administrative charges, fund management costs etc. Other than the market & distribution costs, the other costs get defrayed proportionately to the Direct Plan holders also.
There has been a surge of direct plan investments in the last few years driven by the lower costs. Who should opt for a Direct Plan and who should go for a regular plan. There are no hard and fast rules but here are five guidelines on whether you need to opt for a Direct Plan or a Regular Plan.
- If you are looking at a portfolio of mutual fund schemes to meet specific goals, it is always better that you opt for a regular plan as you will get the benefits of expert advice on how to good about it.
- A good mutual fund may not be good for you. For example, a particular debt fund may be giving above average returns but the risk profile may not suit you. In that case, it is better you take the services of an advisor who can customise the fund package for you.
- What is your level of understanding of mutual funds? It is a lot more complicated and multi-faceted than you can imagine. Unless you really have the expertise to undertake such detailed analysis on your own, it is always better that you opt for a regular plan and take the services of an expert advisor.
- Direct investing can be specifically risky in case of asset classes like mid-cap funds, small-cap funds, sector funds and thematic funds. In such cases, it is always advisable to seek expert advice before committing money to the fund.
- There is the risk that in the era of free flow of information you are deluged with information. You need to separate the wheat from the chaff. You have new concepts like AI, robo advisory, machine learning, direct mutual fund platform etc. Unless you are on top of all these trends, it is better to take the help of an advisor.