Direct Mutual Fund Option – The Second Anniversary Report

Direct Mutual Funds, the option in which investors avoid distributor trail commission by interfacing with the AMC 'directly', were introduced from 1st Jan. 2013. Here is a performance comparison with the regular option of some arbitrarily chosen funds.

I maintain this comparison file with my automated mf tracker and update it whenever someone's want the comparison in returns.

Equity direct funds have an expense ratio that is (conservatively) about 0.5% or so, on an average lower than the regular funds. This means that the direct investor will earn that much more return for each year they remain invested.

Although 0.5% sounds small, for someone who has invested for 10Y, the difference in corpus will approximately scale as (1+0.5%) * (1+0.5%) * (1+0.5%)* (1+0.5%)........ multiplied 10 times.

Is this large or small is an argument each investor has to answer for themselves.

I know a few investors who do not wish to break the relationship with their adviser because they trust  them. Who am I to argue with that?

Who am I to argue with people who are comfortable with online portals? Not my problem. Not my money.

I also know a lot of investors who are simply too lazy to contact AMCs and think it is difficult. Today this process is trivial with most AMCs. To my knowledge with the exception of HDFC all 'major' AMCs allow a prospective investor to courier KYC and other documents after which an online account and subsequently a folio no is created upon investment.  It is amusing to find young(er) people crib to do minimal paperwork. I would like to think, no one is that busy. It is just a matter of indifference.

By the end of this year, I expect the online investor portal MF Utility to allow investors to 'transact in mutual funds' even as distributors grumble.

In the meanwhile, the direct AUM share of the is pie is steadily increasing. It now stands at 33% 

The media, driven by expert opinions of distributors and fee-based financial planners, continue to print that retail investors do not prefer the direct plan like institutional investors.  This is not true. Retail participation in direct plans is steadily increasing.

Since mutual fund penetration is still low, this means nothing for distributors. They have a huge market to showcase their persuasion skills to. Instead of focussing on that, many write article after article on how an adviser is necessary and how people who don't know how to invest and manage in mutual funds should stick with regular plans.

I would like to believe such articles have contributed to the popularity of the direct plans. It is  like asking someone to not think about mangoes!

Here is a simple thumb rule. If a financial article catches your attention, find out who has written it and recognise what the authors angle could be, before taking it seriously. Please do the same with my posts too.

Do you see anyone writing, invest in gold etfs now? They were the rage a few years back when AMC after AMC started gold ETFs. Do you see people writing closed-ended funds are not that bad now? After the budget did you notice people compare ELSS and PPF? See what I mean? Beware of what you read or see  (including at freefincal).

I have said it several times and proved here and in the investor workshops, that

  • mutual fund investing and management is not rocket science and is as easy as inky pinky ponky
  • fund selection is tertiary. What matters is discipline. If you think a SIP will make you disciplined, please think again.

That is enough yapping. Over to the graphs. Click on them to enlarge.

direct-mutual-fund-2Y-3

 

This is the 1Y and 2Y CAGR returns and the difference between the two fund options.  Do not conclude the CAGR difference will keep increasing with time. It does not work that way.   It will work as mentioned above with the average expense ratio difference, which is equal to the CAGR difference.  You can see that the difference is well above 0.5% for many equity funds.

direct-mutual-fund-2Y-2

 

The FT fund sticks out.  This is because as discussed in FB group Asan Ideas for Wealth, the direct fund options of FT have extremely low expense ratios ... as of now.

direct-mutual-fund-2Y-1

This, on the other hand, will keep increasing with time.

This new year, resolve to buy or switch direct funds. Want some more motivation, check these out:

What do I care? Why do I keep saying, 'go direct':

  1. If a person receives valuable advice from a distributor, then this CAGR difference can be forgotten. Unfortunately, I have come to realize that finding a trustworthy, competent advisor, whose knowledge extends beyond what is preached by the AMCs in their asset gathering initiatives,  is extremely difficult if not impossible.  Yes, yes, yes, not all people are bad. That is statistically impossible. My problem is that the average adviser competence is meaningless because the standard deviation is far too high. So why bother? Go direct. Take charge of your financial life. Be a DIY investor.
  2. I absolutely detest the way distributors and fee-based certified financial planners reacted and responded to the introduction of direct plans. That changed my perception of  financial services industry. They don't care about financial literacy. All they care about is awareness of their services.
  3. Won't honest and sincere advisers be affected if direct plans are promoted? No. Mf penetration, as mentioned above, is extremely low compared to fixed income instruments (FDs, endowments). So there is a lot of room for the direct plan DIY investor and regular plan hand-held investor to co-exist without the advisers cribbing because of insecurity.
  4. Unfortunately, you will neither find the media,  nor the AMCs promoting direct plans. So I do my insignificant part. That is my angle: disgust.

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete  the entire comment or remove the links before approving them.

63 thoughts on “Direct Mutual Fund Option – The Second Anniversary Report

  1. S.K Morthy

    Yes. And you can even start your first time investment in UTI MF directly online without any paperwork, provided you are KYC compliant.

    Reply
  2. S.K Morthy

    Yes. And you can even start your first time investment in UTI MF directly online without any paperwork, provided you are KYC compliant.

    Reply
    1. Bharani

      Every fund allows direct plan. Please check it out. And, once you've enabled online access, it's click of few buttons, that's it.

      Reply
    1. Bharani

      Every fund allows direct plan. Please check it out. And, once you've enabled online access, it's click of few buttons, that's it.

      Reply
  3. Vijay

    Nice article and good to see the benefits in last 2 years... The MF utility if comes to life will solve the pain of maintaining different passwords/logins and will be the true driver for direct investment. Best and easiest to use in Quantum AMC once you are KYC.... it is truly paperless... Any idea when the MF Utility will get launched ?

    Reply
          1. vijay

            I have been using fundsindia but havent found such option. It would be a fantastic option even if they charge a flat annual fee. If you're aware please let me know.

  4. Vijay

    Nice article and good to see the benefits in last 2 years... The MF utility if comes to life will solve the pain of maintaining different passwords/logins and will be the true driver for direct investment. Best and easiest to use in Quantum AMC once you are KYC.... it is truly paperless... Any idea when the MF Utility will get launched ?

    Reply
          1. vijay

            I have been using fundsindia but havent found such option. It would be a fantastic option even if they charge a flat annual fee. If you're aware please let me know.

      1. Bharani

        I always wondered why all AMCs don't go Quantum way - truly paperless; L&T is the closest to that, but even L&T asks us to sign paper documents once I invested.
        I think the reason is: regulations on investor consent: physical signature instead of digital.

        Reply
      2. R Parikh

        Dear Sir,
        Another related aspect what we keep on reading especially on international & US websites is that almost all of the Fund managers & Mutual Fund Schemes have not been able to even beat their benchmark or index & hence they recommend passive investments in ETFs or Index funds, however in India so far we have seen many good schemes which have done better than index or their benchmarks over extended period of time - is this true & would appreciate your article on this interesting & relevant topic. Thanking you in anticipation,

        Sincerely,

        RP

        Reply
  5. Balwant Jain

    Thanks for article. Infact I myself put an equal amont in same fund under direct and regular plan just to test it. Had I come come across your article ,I would have put all money under direct plan only. It is also for this reason that I like Quantum Fund as they don't have any regular plan. I only wish that all fund houses give facility for online investment even for new investor without going for paper work. Why they require documents to be sent by post. Both Pan card and KYC information ican be accessed by fund houses from respective agencies.

    Reply
  6. Balwant Jain

    Thanks for article. Infact I myself put an equal amont in same fund under direct and regular plan just to test it. Had I come come across your article ,I would have put all money under direct plan only. It is also for this reason that I like Quantum Fund as they don't have any regular plan. I only wish that all fund houses give facility for online investment even for new investor without going for paper work. Why they require documents to be sent by post. Both Pan card and KYC information ican be accessed by fund houses from respective agencies.

    Reply
  7. Sandip

    I agree with you completely. Yes all financial planners / advisers should also encourage their clients to go Direct way. It always makes sense to embrace changes which are inevitable, logical and technological, rather than crib about it. If someone is competent and a true adviser / planner / money manager, they will get paid anyway. If it is not making money sense for someone, may be it is time then to bring some changes in his / her business model or pricing.

    Reply
  8. Sandip

    I agree with you completely. Yes all financial planners / advisers should also encourage their clients to go Direct way. It always makes sense to embrace changes which are inevitable, logical and technological, rather than crib about it. If someone is competent and a true adviser / planner / money manager, they will get paid anyway. If it is not making money sense for someone, may be it is time then to bring some changes in his / her business model or pricing.

    Reply
  9. Deep

    Costs are very important aspect of investing.The expense ratio is not insignificant when it compounds exponentially.i used one of your excel based calculators and was shocked to see the diff over 20 years.Increasingly i m becoming a fan of index investing or passive investing.It is simple,low cost and diversified.

    Reply
    1. pattu

      Don't agree with you. Active funds have generated an alpha much higher than their expense ratios. Besides Indian index funds have high expense ratios.

      Reply
      1. Deep

        Index funds with low cost r available in india.HDFC Index Fund charges just 0.15 and IDFC nifty regular charges 0.22.True lot of active funds have done better than Index but is past performance a guarantee of future performance ,i don't think so especially if my investment horizon is very long.In future also lot of active funds would beat the Index ,but how do i pick them ? I would rather go with collective market intelligence as represented in the index and will be happy with index returns as a fare share of market returns .Don't get me wrong . i m not discouraging active management but i m personally more comfortable with index investment.

        Reply
        1. pattu

          It is not about active vs passive funds. What matters is if your folio has beat the index. A an active fund folio with periodic rebalancing will lock-in the alpha and therefore will beat the index even if the fund itself does not. When beating the index is so easy, I think we should make our money work harder by investing in active funds.

          Reply
  10. Deep

    Costs are very important aspect of investing.The expense ratio is not insignificant when it compounds exponentially.i used one of your excel based calculators and was shocked to see the diff over 20 years.Increasingly i m becoming a fan of index investing or passive investing.It is simple,low cost and diversified.

    Reply
    1. pattu

      Don't agree with you. Active funds have generated an alpha much higher than their expense ratios. Besides Indian index funds have high expense ratios.

      Reply
      1. Deep

        Index funds with low cost r available in india.HDFC Index Fund charges just 0.15 and IDFC nifty regular charges 0.22.True lot of active funds have done better than Index but is past performance a guarantee of future performance ,i don't think so especially if my investment horizon is very long.In future also lot of active funds would beat the Index ,but how do i pick them ? I would rather go with collective market intelligence as represented in the index and will be happy with index returns as a fare share of market returns .Don't get me wrong . i m not discouraging active management but i m personally more comfortable with index investment.

        Reply
        1. pattu

          It is not about active vs passive funds. What matters is if your folio has beat the index. A an active fund folio with periodic rebalancing will lock-in the alpha and therefore will beat the index even if the fund itself does not. When beating the index is so easy, I think we should make our money work harder by investing in active funds.

          Reply
  11. Anonymous

    Thank you. The only reason I am continuing with older regular funds is the tax angle.How to avoid this!

    Everything since is direct.

    Reply
  12. Anonymous

    Thank you. The only reason I am continuing with older regular funds is the tax angle.How to avoid this!

    Everything since is direct.

    Reply
  13. JD

    It is also feasible when you are less no of funds to invest.
    I changed my IDFC Premier equity with HDFC Midcap as i have already direct account with HDFC. Now my investment is with quntum, Franklin and HDFC only.

    Reply
  14. JD

    It is also feasible when you are less no of funds to invest.
    I changed my IDFC Premier equity with HDFC Midcap as i have already direct account with HDFC. Now my investment is with quntum, Franklin and HDFC only.

    Reply
  15. Prashant V.Joglekar, Chalisgaon (pin.-424101) , Maharashtra.

    Dear Sir,

    Because of you many of us were able to enrich our knowledge of finance & the complex calculations in the finance.
    I Wish you & your family a very happy , healthy ,wealthy & a safe new year.

    Regards,

    Prashant Joglekar

    Chalisgaon

    Reply
  16. Prashant V.Joglekar, Chalisgaon (pin.-424101) , Maharashtra.

    Dear Sir,

    Because of you many of us were able to enrich our knowledge of finance & the complex calculations in the finance.
    I Wish you & your family a very happy , healthy ,wealthy & a safe new year.

    Regards,

    Prashant Joglekar

    Chalisgaon

    Reply
  17. thiru

    Sir, your posts and calculator have been instrumental in coverting all my funds to direct even if it resulted short term pain.

    However this is not always smooth and need to consider capital gains as well. My experience Franklin templeton AMC was the most painful. I had started making direct investments (purchase, STP start, switch..etc) through their website. However they refused to stop an STP between two direct funds citing that the folio was created by making the initial investment through the broker and asked me to go to the broker for any transaction. This request had to be made through a written request to the AMC as the option was not available through their website. Also their customer service representative in chennai was quite abusive when I tried to explain that I cannot go to the broker for transactions on direct funds. Given their nexus with the distributor community I have since switched / redeemed all the investments with FT which are quite average by the way . Their loss not mine.

    Reply
  18. thiru

    Sir, your posts and calculator have been instrumental in coverting all my funds to direct even if it resulted short term pain.

    However this is not always smooth and need to consider capital gains as well. My experience Franklin templeton AMC was the most painful. I had started making direct investments (purchase, STP start, switch..etc) through their website. However they refused to stop an STP between two direct funds citing that the folio was created by making the initial investment through the broker and asked me to go to the broker for any transaction. This request had to be made through a written request to the AMC as the option was not available through their website. Also their customer service representative in chennai was quite abusive when I tried to explain that I cannot go to the broker for transactions on direct funds. Given their nexus with the distributor community I have since switched / redeemed all the investments with FT which are quite average by the way . Their loss not mine.

    Reply
  19. Shruti Mehrotra

    Sir,
    I came across your blog recently. This article is really an eye opener for me. I am investing in Mutual funds from last four years through Fundsindia. I did not know about direct plans. So many times I came across direct plans but I never paid attention to find out what are they. I always went for regular plans. Right now I have five SIPs running. Also I invest Lump sum money in few schemes. I am confused now what to do. Because the most convenient thing going through online portal is my portfolio is just one click away. Please guide me what to do. Because most of the investment I am doing is according to my research. I am hardly taking any advice from the portal.
    Regards,
    Shruti Mehrotra

    Reply

Do let us know what you think about the article