Many investors are fascinating to invest in mutual funds schemes under the option of ‘Direct Plan. Direct Plan under mutual fund schemes can be identified as having the suffix of ‘Direct’ word in their scheme name. The word ‘direct’ implies, under this option, dealing with the AMC directly without any intervention of mutual fund distributors and financial advisor or intermediaries etc. Owing to this option, every mutual fund schemes have had to provide two different NAVs, one is for ‘Direct’ and other is for ‘Regular or Normal’. This is resulting to existing plans have now become regular plans, in which distributor commission is being paid and the other would be the direct plan, having lower expense ratio due to not paying any commission and incentive to distributors which leads to produce higher NAV and is able to generate marginal high returns in compare to regular plans over the long-run. Though the direct plans are appealing to invest in mutual funds to get extra returns which may vary from 0.10% to 1.50% percent, that small differential could backfire to the investors without any proper advice, investing in a wrong mutual fund scheme and/or poor knowledge of the investment process. Hence, in such a case it is imperative that every amateur investor should understand the various nuances about investing in mutual fund schemes under direct option.

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To resolve this conundrum all this requires some words of experience.

Pre and Post Documentation Process

The first time investors, who are not conversant about investing in mutual funds, should abstain from buying the product under direct plan option. The reason is obvious that they would have to do a lot of their own research, to provide time and energy to study the different schemes offered by mutual funds. Remember, the first time investing in mutual fund is not cake-walk. You would have to undergo with tedious, long and pre investment documentation process such as getting the forms, filling it, first time KYC requirement and finally submission to AMCs which are the most likely located at different places. There are also involved various post investment non-financial activities while investing in funds such as change of address, change of bank mandate, consolidation of folios, transmission of funds, inclusion of nominee, handholding on minor investments, arranging for periodical statement of accounts, correction of mistakes in the account, change in KYC, change in contact information, etc. This takes a lot of time and resource for getting things in order, and finally maintaining all documentation could end up costing the investors in more ways than one.

Selection of Mutual Fund Scheme

At present, there is a plethora of funds available in host of websites hogging to provide information i.e. more than 4,500 schemes floating around in the market and led to an increased dilemma in the mind of investors while choosing the right fund. While investing in mutual fund schemes, all of you should ask yourself relevant questions such as – What kind of scheme should you choose? How much should you invest? Whether you should opt for a systematic investment? What would be the cost of choosing a wrong equity scheme? What should be the investment horizon? etc.; but in order to take a wise investment decision it is imperative to assess which resources you tap and to select the right scheme. For example, the best multi-cap fund delivered an average return of 14.3% in the last three years, whereas the worst performing multi-cap fund delivered an average return of just of 7.91%. There is almost a 7 percentage point difference in returns and overrides the extra return to the tune of 0.10% to 1.50% under direct plans. You can actually lose money in a bad scheme even when the market is doing well. Many investors also feel that ‘any’ mutual fund can help them achieve their desired goals. But the fact is, not all mutual funds are same. While understanding your risk profile and financial goals, there are also various aspects within fund that you must carefully be keeping track of the performance of schemes and their investment management style.

Cost of switching from existing regular plan to a direct plan

A lot of caution here also for existing investors, who are tempting to switch from regular plans to direct plans , there may be very much costs involved and are not hassle-free as switching makes the dual transaction as redemption and purchase simultaneously. This may create triple whammy factor, one is exit loads would be applicable as high as 3% imposed by mutual fund houses for moving to direct plans from existing regular plans where it made within six months. Another is also tax an implication arises in the form of short-term capital gains (STCG) tax, if the investments redeem before 12 months. Therefore, you will have to pay STCG tax on investments for equity schemes which work to 15 per cent on the gain. Likewise, you would have also to pay STT at 0.025 per cent on that redemption.

Over to you

Now, it is up to you have to decide that should you gravitate towards direct plans with marginal higher returns subject to carry hidden cost and more efforts involved OR reasonable return with high adding value through an investment advisor who provides independent and unbiased financial advice, keeping away his vested interests in commission. Don’t shun, if he charges you a separate advisory fee, as long as he can help you to capture that pinnacle of wisdom which would assist you to do prudent investment planning. We are of opinion that direct plans are totally compromise on convenience to some extent as you need to spend time and extra efforts in selecting the most suitable fund and track its performance. In fact, the spirit of investing under direct plan was to reduce the cost of fund which seems to get defeated, not precludes investment advisors who provide right financial planning service to their clients who are seeking an unbiased advice to choose winning mutual fund schemes for their healthy portfolio.

Every savvy investor should recognize the facets to be looked into while selecting a prudent, independent and unbiased investment advisor who is quite akin as selecting a good spouse in many ways – who can stand by you through health and sickness.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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