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Mutual Fund Investment: Why investing in direct plans of mutual funds is a better bet

The only difference is the cost saved which will reflect in higher returns.

Direct plans in mutual funds have existed since 2013 and yet many are not even aware of it. Under direct plans of mutual fund scheme, investors can directly invest with the mutual fund house. There is no distributor/intermediary or commission involved, so this reflects lower expense ratio. The fund manager and the portfolio of stocks will all remain the same. The only difference is the cost saved which will reflect in higher returns.

Higher returns
So direct plan will always give higher returns than regular plans and NAV of direct plans will always be higher than regular plans (as they are giving more return and no cost involved). You can always check for the returns on any mutual fund's website. Now with the internet age, everything is possible in a matter of minutes, be it is comparing the returns to customising your product. No need to calculate manually.

HDFC Equity Fund is a well-known name so I will compare NAV of direct and regular plans of HDFC Equity Fund. Since the inception of direct plans in 2013 (January 1, 2013), the difference in NAV of regular and direct plan was 0%. In 2014, the difference was 0.67%. In 2015, it was 1.38%. In 2016, NAV difference jumped to 2.22%. In 2017, NAV difference was 3.08% while in 2018 (1-Jan 2018) and 2019 (1- Jan 2019) it was 3.98% and 4.95% respectively. The gap continues to increase every year and many investors opt for regular plans as they think direct plans are more expensive since NAV is higher than regular plans. But it is a wrong way of thinking and opposite is true.

Faster growth
NAV of direct plans are higher and will always be higher than regular plans. But it is not expensive as direct plans have lower expense ratio which means NAV of direct plans will continue to grow faster. You will get fewer units but you will get higher returns. One example is lump sum amount invested in HDFC Equity Fund on January 1, 2013 of value Rs 10 lakh. The value at end of December 31, 2018 would be Rs 21.20 lakh in regular plan and Rs 22.25 lakh in direct plan.

That is a difference of close to 4.95% extra you get if you invest in direct plans. What about systematic investment plans (SIPs)? Even though you get a lesser amount of units in direct plans, you still end up with larger corpus at the end of the term. The difference in return would be around 3%, i.e., you will get 3% more than what you would have got had you invested in a regular plan.

So investors should keep in mind the benefits of direct plans but get into direct plans when they know which mutual funds are good for them and if they fulfil their goals. If you are getting proper advice from an investment advisor then direct plans are best. After all, why should one lose out on additional returns which are available to direct plan investors only.

The writer is CMD, Tradebulls Securities