In one of earlier posts, we discussed how you can avoid distribution costs by investing in direct plans of mutual fund schemes. We also established the quantum of long term savings you stood to make by investing in direct plans of MF schemes. To find out more about direct plans, read our post in Business Standard about direct plans of mutual funds here.
We have received a lot of queries on e-mail, social media forums and phone seeking clarification on direct plans. In this post, we will address some of common doubts investors have regarding direct plans of mutual fund schemes.
NAV of direct plans is higher than NAV of regular plans. You get lesser number of units.
Yes, you get lesser number of units of direct plans because the NAV is higher. And NAV of direct plans is higher than NAV of regular plans because direct plans provide better returns.
A few investors think that they are getting a better deal in regular plans because they are getting more number of units. Nothing could be further from the truth. Such approach is akin to investing in new fund offers (NFOs) because the NAV is low or in a stock because its market price is low. A low NAV does not mean that the fund is cheaper or better. In fact, it may mean quite to the contrary. A lot of investors preferred to invest in NFOs for the same reason. Fortunately, due to regulator intervention and investor awareness, most investors have shunned this approach.
While comparing two investment products, you must compare the associated risk and return levels. Since the risk is same in direct and regular plans, you must compare the return levels. Direct plans cannot underperform regular plans. It is a mathematical construct. As long as 2+2=4, direct plans will continue to outperform regular plans. Everything (portfolio, fund manager etc) is same under direct and regular plans except the distribution cost. Since there is no intermediary in direct plans, distribution costs are avoided and that reflects in better returns.
Let’s consider an example. We will consider an investment of Rs 10 lacs each in direct and regular plans of the same scheme. We have assumed an annual return of 10% in regular plan and 10.75% in direct plan.
You can see that even though you got lesser number of units in direct plans, you still ended up with a larger corpus at the end of the year. This is because the difference between the NAVs has grown. Earlier, it was Rs 10. After one year, it is Rs 11.8. The difference in NAV will keep getting bigger.
Hence, direct plans will give you better returns than regular plans. It is a FACT.
Can I purchase direct plans under the same folio?
Yes, you can. If you have been investing through a distributor and already have a folio with a MF house, your investment in direct plans of the scheme can be kept under the same folio. So, under the same folio, you can have direct and regular plans of MF schemes. Folio number is a unique identifier for your investments with a particular mutual fund house. All your investments with a fund house can be identified with a unique folio number.
Are you comfortable with online transactions?
If you have invested with a MF house before and have online login credentials, you can simply login into MF website and invest in direct plans of your choice. Before the advent of direct plans, I had been investing in HDFC MFs through an online portal. I requested the HDFC MF to provide me online login credentials. You do not always have to request MF house to provide you online credentials. Most mutual funds allow login through folio number and other investor information such as PAN and bank account details. You can check the exact method with MF customer care if you are an existing investor.
Now, I can invest in direct plans directly from HDFC MF website. You can see the following snapshot from HDFC MF website:
I have struck out the folio number and investor name. You can simply select the Direct Plan and start investing in the direct plans of MF. The units purchased will be added to the same folio. “Existing Plans” are the regular plans.
What if you are not comfortable with online transactions?
If you are not comfortable with online transactions, you can visit the MF office and submit a purchase/SIP registration form. To avoid any confusion, remember to write “Direct Plan” in front of scheme name. For instance, in the scheme name field, mention “HDFC Balance Fund- Direct Plan”. You must also specify the folio number for the new units to be allocated in the same folio.
Here is the list of scenarios possible while filling out the purchase form and the treatment (available on HDFC MF website). This is the treatment by HDFC MF. Other MF houses may have a different treatment. You can find this information on HDFC MF website.
ARN code is the identifier for the distributor. While making an application for investment in direct plans, you can strike off this field or leave the field blank.
To avoid any confusion, write “Direct Plan” in front of scheme name and strike off ARN code field. The new units will be allocated under the same folio.
Going through a bank will get you invested in Regular plans
A few people have complained that they went to a bank to invest in direct plans but got invested in a regular plan. You must understand banks act as distributor/intermediary of mutual fund houses and get commissions just like other distributors. If you go to banks for investing in mutual funds, you will always get invested in regular plan of mutual fund schemes.
So, if you go to Axis Bank and invest in any MF scheme of Axis MF, you will always end up investing in a regular plan. Visit the nearest local branch of the mutual fund house if you want to invest in direct plans.
PersonalFinancePlan Take
Direct plans of a MF scheme will always outperform regular plan of the same MF scheme. However, before you invest in the direct plan of MF scheme, you need to find a good mutual fund to invest in.
Direct plans are best suited to do-it-yourself investors, who are willing to devote time and energy to research mutual funds on their own. Such investors can save costs by investing in direct plans.
If you do not have time and skill to research the best mutual funds for you, you can approach a MF distributor for advice. Though distributors will get you invested in regular plans, they will be in a position to guide you better about your MF investments. I would rather invest in a regular plan of an excellent fund than a direct plan of a mediocre fund.
Alternatively, you can seek services of a fee-only financial planner or a SEBI registered investment adviser. Such advisers/planners can help you with MF recommendations for a small fee and you can invest in direct plans subsequently.
Image Credit: Simon Cunningham/LendingMemo[dot]com, 2013. Original Image and information about usage rights can be downloaded from Flickr.
Deepesh is a SEBI Registered Investment Adviser and Founder, PersonalFinancePlan.in
Source : http://www.personalfinanceplan.in
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