Mutual Fund SIP Report: Direct Plan vs Regular Plan (2020)

Direct plans in which no commissions are removed daily from the NAV along with expenses (prior to publication) were introduced on 1st Jan 2013. This is how a seven-year SIP and a seven-year lump sum in the direct plan and regular plan of the same mutual fund have fared from 1st Jan 2013 to Feb 28th 2020. Please share this article with investors who are still holding regular plans.

It must be made clear to the reader that the primary reason to shift from regular plans to direct plans is to avoid conflict of interest. For the DIY investor, the lower cost over the long term is a no-brainer.

Distributors have been trying all sorts of tricks to prevent investors from redeeming from regulars plans. Some claim that since the direct plan is higher it will result in lower no of units purchased. This myth has been busted before (so will this data): Direct Mutual Fund NAV is higher so Investors will get fewer units: Is this bad?

Another misinformation used to prevent exit is, “SEBI has said direct plans are only for knowledgeable investors”. This is similar to how insurance agents and employees try to dissuade policy surrenders. I am fairly sure freefincal readers will have such colourful stories to share. Please do in the comments section below.

Investors harassed by distributors should complain to SEBI via their SCORES portal. Note: investors need not inform their distributors before switching out. AMC staff would say this to stop you, but this is wrong.

Those who want assistance may pay a flat fee (not a fee linked to amount invested)) to a SEBI Registered fee-only Investment Advisor. Note a fee-only financial planning is a holistic service including goal-planning, tax-planning, insurance (life/health) and estate planning (will creation, trust creation etc). So please do not compare “fees” of a fee-only with a distributor.  It makes even lesser sense to compare the fees of a fee-only planner and a fee-based (fees + commissions).

This report is for those still investing in regular plans. They can pull out some money from regular funds before March 31st (up to one lakh capital gains overall is tax-free for equity, equity mutual funds). Another shift can be made be in April 2020.

For this study, we shall consider 106 large cap, large and midcap, multicap, midcap and smallcap funds in existence on or before 1st Jan 2013. Return (XIRR) from a Rs. 1000 monthly SIP from 1st Jan 2013 is considered.

The difference in XIRR of a SIP started on 1st Jan 2013 in a direct plan and regular plan is shown below. The horizontal axis is only a serial number. Note that the XIRR has not been arranged in ascending or descending order.

The difference in value as on Feb 29th 2020 ranges from 138 to 11,000 for a monthly Rs. 1000 investment. If the AMCs had not tinkered with direct plan expense ratios frequently, the difference could have been significantly more!
See for example: 48% increase in expense ratio of Birla Reg Savings Fund! Time for SEBI to act?

The highest difference in XIRR (top 25)

The lowest difference in XIRR (bottom 25)

Returns for a lump sum invested on 1st Jan 2013 (CAGR) versus the SIP XIRR is plotted below. The near-linear trend is hardly surprising as commissions for the regular plan are removed each business day.

This article has merely quantified the obvious. Time to wake up, smell the coffee and redeem from regular funds.