InvestorQ : What are the pros and cons of investing in mutual funds via the direct plans of these funds?
Debbie Mascarenhas made post

What are the pros and cons of investing in mutual funds via the direct plans of these funds?

Crowny Pinto answered.
3 years ago

A direct plan is just like any mutual fund the only difference is that you don’t get the benefit of any customized advice. The fund charges you lower total expense ratio (TER) and in case of equity funds the difference can be as high as 125 basis points. Here are some of the major pros and cons of investing via direct plans. Investing in a Direct Plan is quite easy and you can directly walk into the office of any mutual fund and opt for the direct plan. There are a few basic things to remember in a Direct Plan…

· Since you are directly investing in a fund, the upfront commission and the annual trail fee will not be debited to your NAV. However, it needs to be remembered that other administrative and incidental charges will continue to be debited to your NAV. The net benefit on an annualized basis works out in the range of 0.5%-1.5% if you opt for a direct plan depending on whether it is an equity fund or a debt fund. The benefit is much larger on an equity fund.

· In case of mutual fund schemes, the NAV of the Direct Plan is disclosed separately from the normal growth plan and the NAV of the Direct Plan is higher as there are no commission and trail fees debited to it. This practice has been going on since January 2013 only.

· There is a downside to direct plan investing. Investors need to be aware that when they invest through the direct plan they could miss out on the advisory service that the intermediary provides. Buying a mutual fund requires fund selection, portfolio monitoring and performance monitoring. Normally, your financial advisor will do these tasks for you. Hence when you opt for a Direct Plan you need to be prepared to hand all these tasks yourself. Alternatively, you can pay for the services of an advisor separately and execute accordingly. The choice is yours.

· For passive investing, or for long term investing on a rule based approach, these direct plans can certainly add value. From an application perspective, a Direct Plan can add value if you are looking at an equity fund SIP over the long term provided you are willing to stick to the tried and tested funds. In this case, not much of advisory support is required. However, if you are looking at your mutual fund investment as a step towards the attainment of your long term goals, then it is always better to go through your financial advisor. The concomitant benefits of a knowledgeable advisor will be much more than the commission charges saved.

· The savings over the longer time frame can be substantial and can make a difference to your effect net returns. According conservative estimates lower expense ratio has saved billions of dollars for mutual fund investors in countries like the US. The Indian mutual fund industry is relatively much smaller. Investors need to, therefore, opt for a trade-off. By opting for a direct plan, the investor is himself responsible for the documentation, investing and the monitoring of the portfolio. This entire task could get a little more complicated if you are investing in mutual funds as part of a larger financial plan. The call you need to take is whether the cost is more critical or the goal.

The decision to opt for a direct plan must be taken after taking all these factors into consideration.