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How investors can get more from Direct Mutual Fund plans
By Narendra Nathan, ET Bureau | Updated: Jan 26, 2015

He's been investing in mutual funds for some time now but Anish Iyer didn't contact his broker
when he wanted to buy a tax-saving fund.Anish Iyer didn't contact his broker when he wanted to
buy a tax-saving fund.

Instead, he visited the website of Axis Mutual Fund and invested in the direct plan of its ELSS
fund. "I came to know that direct plans are cheaper and offer higher returns," says the Mumbai-
based consultant. Savvy investors are making the most of a Sebi rule that came into effect two
years ago. The market regulator got mutual fund houses to launch the direct plans of all
schemes in 2013. These plans are bought directly from the fund house, bypassing the
distributor. The savings on agents' commission are passed on to investors in the form of lower
expense ratio. The regular plan of the Axis Long-Term Equity Fund has an expense ratio of
2.33% but Iyer will pay only 1.63%.

The industry-wide mutual fund utility platform, once operational for investors by June this year,
should make direct investments easier for individual investors.

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In direct plans, lower charges translate into higher returns for investors. In the past two years,
the regular plan of Axis Long-Term Equity Fund has given annualised returns of 40.4% while the
direct plan has delivered 42.2%. Don't underestimate the impact of this difference. Even a
difference of 1 percentage point can balloon into a huge gap due to compounding in the long
term. In five years, the difference in the corpus is 4% but over 30 years, the corpus of the direct
investor is 30% bigger (see chart).

It's important to note that the difference in the returns is more pronounced in case of equity
funds. In debt funds, because the expense ratio of the regular plans is not too high, the
difference is lower. In liquid funds, where the expense ratio is very low, the difference is wafer
thin. The average direct diversified equity fund has delivered 128 basis point higher returns in
the past one year, but the difference in case of liquid funds is only 14 bps.

Despite the tremendous opportunity in equity funds, very few investors have taken the direct
route. According to a Crisil study, direct plans of equity funds account for less than 7% of the
total investments. In debt funds, 21-38% is in direct plans. But it is the corporate investors who
have taken to direct plans in a big way. Nearly 58% of the total AUM in liquid and money market
funds is in direct plans.

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Can you invest on your own?

Though direct plans give higher returns, the do-it-yourself approach has its own challenges.
"Though there is a significant benefit of investing in direct plans, not all decisions should be
based on returns," says Mumbaibased financial planner Gaurav Mashruwala.

Direct plans are meant for investors who know which funds to buy. They are not for newbies
who will not know the difference between a mid-cap opportunity funds and an index fund. They
also won't know how to judge a fund's performance and its risk parameters. It won't make sense
to save 80-100 bps on charges and invest in a fund that underperforms its category by 300-400
bps.

We have identified funds with the highest difference between returns of the direct plan and the
regular plan. All have been rated five stars by Value Research. Direct plans of equity funds are
not rated as they have not completed three years (see table).

The other challenge is the legwork and paperwork required. When you invest for the first time,
you have to submit certain documents to the fund house. You will have to visit a branch office
and fulfil the KYC formalities. However, fund house are trying to make it easier for investors. "I
posted a request on the Axis website and within no time, I received a call from the fund house.

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They sent me the PDF of the application form and listed the documents I had to submit. Then
someone came and picked them from my residence within a few hours," says Iyer.

It's simpler if you are an existing mutual fund investor and have fulfilled KYC requirements. Then
all you need to do is log in on a mutual fund website, complete the registration and start
investing. However, you have to keep a record of all your login IDs and passwords of the fund
houses you invest in. "A significant shift to direct plans will happen only when the mutual fund
utility from AMFI becomes operational," says Manoj Nagpal, CEO, Outlook Asia Capital. The
platform is expected to be fully operational for distributors in the first week of March and for
individual investors by around June.

"The investor log in will be enabled in the second phase, where the investor will be able to
transact as well as get information about all his investments, in June-July," says V. Ramesh, MD
& CEO, MF Utilities India. However, the going is not so smooth for the offline investor. He will
have to visit the fund house branch or registrar office for every transaction. This is one of the
reasons why retail investors still stick with their mutual fund distributors. They are willing to pay
as long a s the agent does the legwork for them.

Another reason investors are not going direct is that their portfolio is not very large. "To make a
meaningful difference, you need a large portfolio," says Tanwir Alam, Founder & CEO of

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Fincart. If the portfolio is tiny (say, Rs 50,000-60,000), a 50bps higher return will translate into a
gain of only Rs 250-300. Corporate investors find it more rewarding to go direct. Even a
difference of 10 bps means an additional gain of Rs 2 lakh on an investment of Rs 20 crore.

Selecting the best plan

While direct plans are cheaper, the low cost should not be the criterion for selecting a fund.
Choose a fund that has a good track record, matches your risk profile and is suitable for the
goal you are investing for. Once you have selected the fund, invest in the direct plan of that
scheme.
Corporate houses have dedicated finance teams, so it is easy to select the right scheme. But
retail investors need guidance. This need is partly met by distributors, but they may not be
qualified to advise. Their advice may be coloured by the commission they get on each scheme.
In recent times, when funds launched a flurry of closed-ended fund schemes, distributors went
all out to sell these funds to earn the higher commission paid by fund houses.

But savvy investors don't need to go anywhere. Turn to page 22 to know the best schemes.
Once you decide on the scheme, get in touch with the fund house. Bengalurubased IT
professional Stanley Anthony tracked the performance of ELSS funds for 3-4 months before he
invested. "I shortlisted three tax-saving schemes and monitored their performance. I contacted
all three fund houses but only two of them responded. So I invested in their ELSS funds," he
says.