Why Direct Plans

It’s being two years since direct plans in mutual funds came into being. Much has been debated on these investments as to whether they are really helpful for the investors or not. The distributors have been against it since it threatens their survival while it makes a strong proposition for financial planners as it allows them to save more for their clients. But if we look at more closely then direct plans are actually benefiting investors. The difference they are producing might look paltry in just two years but even if you do some assumed calculation it does creates great deal of difference in the long term. Moreover with Investment Advisor regulations in place the direct plans make a case for all investors as the advice is now completely separated from the product.

What Are Direct Plans?

Direct plans, as the name suggest, is investing directly with mutual funds companies. There is no intermediary such as an agent or distributor involved for claiming the share of income from your investments. This saving on commissions by the mutual funds companies is being passed on to the investor with lower expense ratio in direct plans.

The Difference

The major difference of direct plans from regular plans is the expense ratio. In general this difference is about .5-1% but reviewing many schemes the difference has come out to be higherat present.Lower cost in any investments leads to better returns of the investor. Same is being seen in direct plans where the difference of expense ratio is leading to almost the same (higher in some) difference in the returns. This difference is substantial when you invest for long term. For example investing Rs 15000 per month for next 20 years in both these plans you will end up accumulating Rs. 23 lakh higher in direct plans with 1.5% difference in the returns. Even a 1% difference will give you Rs. 15 lakh additional money.

Is Your Advisor Avoiding Direct?

Most investor will meet this situation where they have been investing through a mutual funds distributor and have been dissuaded to invest through direct plans. The reason is more about the no commission structure then receiving the information. In many discussions even the difference is countered for the benefit of long term association with an advisor. However, there is one more reason for this avoidance and that is SEBI Regulations. The regulator has completely separated advice from product selling wherein any advice on your financial situation can be delivered only if the advisor is registered with SEBI. So your distributor can only sell mutual funds but cannot advise you on your complete financial situation. For investors the difference in the cost allows you to hire an advisor for a fee and ensure you receive a holistic advice which an unregistered advisor cannot deliver.

There are strong reasons for direct plans then against it. As an investor what benefits you has to be on priority. Going forward with SEBI intending to improvise the regulations you will engage only with an Investment Adviser for investment advice. Even if you have to spare some time in the process then it will be worth spending to reap the benefits.

Special Needs Financial Planning
Special Needs Financial Planning