Mutual Funds come in two variants – a regular plan and a direct plan. There are 3 reasons why you must consider direct plans. These are lower cost, good support and most importantly zero conflict of interest.
Just 1.5%. It’s a small difference between direct plans vs regular plans – but one that could decide whether your holiday in New Delhi or New York, or retire at 45 or 60. Tall claims? Of course, not. Over time, the difference in the expense ratio would add up significantly, thanks to the power of compounding.
Let us look at a lumpsum investment made in an equity fund such as Axis Midcap fund. Here are the data and assumptions:
- Fund Name: Axis midcap fund (as an example; other funds may have different data)
- Actual 5-year returns of the fund are used (as on 26 July 2019)
- An investment time horizon of 30 years is taken because that closely resembles the earning years of a person
|Expense ratio||Amount invested||5 yr returns||over 30 years|
|Savings||1.38||1.33||12,06,174.62or 42.6% more!|
As you can see the fund returns are different between the direct and regular plans. In fact, the direct plan gives Rs 40.38 lakhs which is 42.6% more than the regular plan which gives 28.3 lakhs over the investing career of the person. Interestingly the published expense ratios of the two plans are also very similar to the difference in actual returns given by the fund over the last 5 years.
Let us look at another example, a SIP of just Rs. 5,000 a month in a direct plan, over 25 years, would yield an additional Rs. 28 lakh over a regular plan.
|Regular Plan Expense Ratio||Direct Plan Expense Ratio||Regular Plan Returns||Direct Plan Returns||Savings with Direct Plan|
|Kotak Classic Equity||2.68%||1.2%||2.6cr||3.5cr||90 lakh|
|Axis Equity Fund||2.11%||1.01%||2.6cr||3.1cr||50 lakh|
|Aditya Birla Sun Life Frontline Equity||2.14%||0.96%||2.6cr||3.3cr||70 lakh|
|HDFC Top 200||2.04||1.29||2.6cr||3cr||40 lakh|
Assumptions: SIP of Rs 8,000 over 30 years; returns of 15% on a regular plan.
You can check whether any of your existing investments are in direct plans by looking for ‘Direct’ or ‘Direct Plan’ in the scheme name. If it doesn’t contain either term, you have been investing exclusively in regular plans.
Hence one can see that over the long term, regular plans could cut up to 40% of your wealth.
#2 – Direct Plans are well supported by SEBI Regd Advisors
There are only two ways to invest in direct plans: through the mutual fund houses directly or through an advisor, such as Jama. Everyone else — from your neighborhood agent to cool looking websites such as FundsIndia, Scripbox or MyUniverse — is either a distributor or a broker.
The main advantage of Direct plans is that there are many SEBI Registered Investment Advisors who can guide you through the entire investment process for a small fee. This fee will be a fraction of what you lose as commission to banks/agents/brokers/IFAs.
#3. Direct Plan Advisors are Unbiased with Zero Conflict of Interest
For many investors, the agent is a friend or family member. Investments are, therefore, made somewhat passively. There is a risk of advisors recommending plans on the basis of the amount they will earn in commission, not on the merit of the plan. This has been seen with many closed-ended funds, New Fund Offerings (NFO).
Because many advisors get a higher commission on equity investments, they may have a vested interest in overselling equity. When markets are expensive, they may not offer timely advice to reduce equity exposure.
What is trail commission?
As mentioned above between direct plans vs regular plans, you can save 1.5% each year on your mutual fund investments by investing in direct plans. This is because direct plans have an expense ratio of closer to 1%, while regular plans average an expense ratio of closer to 2.5%. The difference is the amount paid out to distributors and brokers, who earn commissions, not just the day you make your investment but for as long as your money is in the scheme. Shocked? This is known as trail commission.
Agents keep earning a commission at varying rates for as long as you’re invested in a scheme. So if you have a SIP going for the past 10 years, you’ve been paying your agent for each of the past 10 years. Even if you haven’t met or spoken to the agent, he/she is still receiving payment.
Why Jama is the way to go direct
Jama is a direct-only platform with tie-ups with all major AMCs. We don’t earn a single rupee in commissions from you. Additionally, we have all the tools necessary to build a comprehensive financial plan to recommend the right mutual fund schemes to you. For all of this, we only charge you a small subscription fee. Know more about our plans here.
The returns of a direct plan of a fund will be slightly higher by up to max 2 percent than that of a regular plan. The savings on agent’s commission are passed on to investors in the form of lower expense ratio. Switch to direct mutual funds through registered online mutual fund transaction with individual AMCs.