After 3 years, Direct plans have more stars than regular plans!

Mutual fund star ratings portal Value Research now awards more stars to direct plans than regular fund! Three years is the minimum period for equity funds to become eligible for star ratings. Direct plans are now 3Years and close to 3 months old.

When they were introduced on 1st Jan. 2013, VR had assigned them a provisionl  rating identical to the corresponding regular fund. This was probably because they were not old enough for an independent rating.

Personally, I neither use nor recommend the use of star ratings. This post is for information purposes only.

Value Research offers a 'return grade' and 'risk grade' based on a combination of 3-year performance and 5-year performance (where available).

Let us consider the case of ICICI Prudential Arbitrage Plan as an example to understand why direct plans now have a higher star ratings.

direct-mutual-fund-vs-regular-mutual-fund-1

If you are not comfortable with risk-adjusted measures, you can consider a non-technical account here Visualizing Mutual Fund Volatility Measures and a list of technical definitions here:
Mutual Fund Risk and Return Analyzer.

Notice that the direct fund scores over regular funds not just in returns but also in risk adjusted returns! That is direct plans offer more reward than regular funds for the risk taken. This is a significant manifestation of outperformance and something that I did not realize before.

Now look at the return ranks. Over a 3 month period, the direct plan is ranked 3 and the regular plan 22!

This means that VR is treating the direct plans as independent mutual funds and grading them in a pool of funds belonging to the same category. This is good news for them as the sample set has doubled in each fund category.

Or in other words, the star rating of a direct plan is independent of the star ratings of the regular plan as found in this case. The direct plan has 5 stars and the regular plan 3 stars.

As of now many funds have only a 1-star difference but this gap is only going to widen in time! This was predicted my Dr. Ramesh Mangal one of personal finance influencers in late 2012 itself!

Forget the star ratings. Look at the difference in performance. Now that we have direct mutual fund investment portals, there is no reason not to switch to direct funds.

It is absolutely baffling why many reporters are still asking, 'Are direct mutual funds for you?'.

Direct mutual funds are for EVERYONE! Those who want professional financial advice can simply use these portals and pay a fee-only financial planner.

DIY with direct plans or Pay for Financial Advice, But Insist on Direct Mutual Fund Plans

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14 thoughts on “After 3 years, Direct plans have more stars than regular plans!

  1. lakshminarasimman

    sir,
    that is good news

    do you know how to convert hdfc to direct plan.. i followed your other post but it is very difficult

    if anybody converted existing hdfc folio account to direct please help me how you converted

    Reply
    1. Vivek

      You cannot convert. However you can switch from regular fund to direct fund. It is equivalent to redemption from one mutual fund (regular plan) and simultaneously purchase of another mutual fund (direct plan), hence you will have to take of exit load and taxation (specially for units held for less than a year in regular plan).

      Reply
  2. HARI SINGH

    I fully agree that the return from Direct Fund will be much more higher than regular fund. Even those , who have presently invested in regular plan can redeem their investments (even by paying Exit load ) and can reinvest in Direct Plan. This will be much more beneficial in long run.

    Reply
  3. HARI SINGH

    Dear Laxminarsimman

    Please visit FAQ of HDFC MF website you will find the details about switching over from one scheme to others. For switching over from Regular plan to direct plan , AMC will consider the redemption from regular plan and fresh investment in Direct Plan . Thus the exit load , as applicable, shall be deducted from your investment. Also there will be impact on tax part. The investment of less than 1 year will attract Short Term Capital Gain (for equity MF ) on which you will have to pay the tax.

    Reply
  4. Sudhakar

    @Lakshminarasimman, I did at at HDFC site and it is simple. First create login account with them using your existing folio number. Later you can simple use the SWITCH option to move to regular to direct. I believe you are aware that switching from regular to direct will be treated as sell & buy (two transactions) and pay attention to exit loads and short term gains considering original purchase transaction dates of regular fund.

    Reply
  5. HARI SINGH

    I have one query.
    Why AMC declare less dividend or no dividend against Direct Plan compare to regular plan . I am regularly investing in Birla Sunlife Infrastructure Fund Direct Plan , Dividend option through SIP but I did not receive any dividend.

    Reply
  6. Sudhakar

    @Hari Singh, generally dividends are declared based on the profits/corpus accumulated so far. Regular funds have enough corpus to declare dividends where as direct funds do not have that much to declare dividends. Point to be noted is, worth of your investment will not change in either case. I believe Mt. Pattu gave explanation in this regard earlier in one of the comments.

    Reply
    1. sundararajan

      I asked / tried to find out answers to this as well. Can any one explain what is this?
      Regular funds have enough corpus to declare dividends where as direct funds do not have that much to declare dividends.
      The cost per unit basis is same for either direct or regular based on what you paid. When the dividend is declared, assuming direct has less funds (due to less corpus), but number of units also less. So total extra corpus divided by number of units should be same for direct and should be more or at least same as regular and shouldn't be lesser. why on earth one pay higher NAV for direct and gets less dividend? Either MF should scrap dividend options for direct or pay higher or equal amount as regular. OR at least say in bold fonts for dividend option, regular is more wiser than direct option. When I tried to get answer from an MF, no one has any clue to my questions.
      I understand for growth option, direct is better option, but not for dividend. Of course questions asked, why go for dividend to begin with? That is whole another topic.

      Reply
  7. Thiru

    Sir,
    I have to thank you for illustrating the benefits of direct plans which helped convince me to switch two years ago. It seemed like a hassle at that time to stop using the distributor portal for purchases but now I am seeing the benefits. Many thanks to you.

    Reply
  8. HARI SINGH

    Dear Sundararajan
    I fully agree with you. Since I will be retiring in next 1 year I had a plan to invest some part of corpus in debt fund (Direct Plan, dividend option ) so that I can get the dividend on monthly basis as the dividend i hand of investor is free. Considering present status of dividend for direct plan I should go for growth plan. I might be in 10 % tax bracket after retirement.

    Reply
  9. HARI SINGH

    Dear Sundararajan
    I fully agree with you. Since I will be retiring in next 1 year I had a plan to invest some part of corpus in debt fund (Direct Plan, dividend option ) so that I can get the dividend on monthly basis as the dividend in the hand of investor is tax free. Considering present status of dividend for direct plan I should go for growth plan. I might be in 10 % tax bracket after retirement.

    Reply
  10. Mitesh Sanghvi

    Hi, It's a good news for all of us investors, both small and big ones. But, I'm still not sure how it's going to play in coming months. Will this growth get down or continue!

    Reply

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