Regular plan vs. Direct plan Mutual Funds: The story so far

Here is a comparison of direct plan and regular plan mutual fund investments made since Jan. 2013, when direct plans came into force.

Direct plan mutual funds are those sold by the AMC direct to the investor without a distributor. Therefore, these plans do not account for the trail commission paid to the distributor from the investors holdings (so your account in a mf web portals is not really free!). Thus the NAV of a direct plan mutual fund is higher than that of a regular plan. The difference keeps increasing with time.

Mutual fund distributors and fee-based financial planners oppose direct plans because they would miss out on trail commissions. So they write article after article about how direct plans are suitable only for those who can manage their finances blah-blah...

Well, it is our money. Instead of worrying about the intentions of the distributor and more importantly their competence, it is better to learn on our own.

This is the main reason I promote ‘direct’ investing. We make ourselves accountable. The extra returns are like cherries on top of an already tasty cake!

People who are used to the convenience of online portals do not want to go direst because of the paperwork involved.

Well, what do you know! Here is some good news:

MF Utility is an online portal funded by all AMCs. Soon investors can buy direct plans of all AMCs from a single platform! Read more here.

In Aug. 2013, seven months after direct plans came into force, I compared the NAV movements of HDFC Top 200 and estimated that direct plans will have a 0.5% higher annual return for each year in investment.

In this post, I present actual difference in returns and holding values for ongoing SIPs in regular and direct plan started on Jan 1st/2nd 2013. Lump sum investments made on these dates are also compared.

Yet again, this post stems from discussions in facebook Asan Ideas for wealth.

This comparison was made with ease using the automated mutual fund and financial goal tracker

First, let us look at the NAV movement of regular and direct plans of ICICI Prudential discovery fund and the difference.

nav-movement

It is clear that the difference in NAV increases rather steadily. The small deviations from a linear increase probably are from changes in the base expense ratio (ie. all expenses except trail commission).

Here is the comparison of SIP and lump sum investments.

direct

Kindly stare at it and make your own conclusions. Let me know if you would like to use the tracker file I used to get this results.

Updates:

Direct Mutual Fund Option – The Second Anniversary Report

Returns Comparison 2016: Direct Mutual Fund vs. Regular Mutual Fund

These results should hardly surprising to most direct investors. The key point is, that the difference in annual returns will be about 0.5% for each year. This difference will compound year on year.

Therefore, after a few years, the difference between corpus and difference in CAGR will be significant.

You can play around with this expense ratio calculator to get a sense of this difference.

Direct plans are slowly but surely gaining ground. According to this article,

 The investments under direct plans have gone up substantially under debt funds. Equity funds have also seen some increase in direct investments, though the pie remains small.

According to CRISIL, debt-oriented mutual funds constituted 98% of the total AUM under direct plans. A large part of the direct plan AUM constitutes of liquid and ultra-short term debt funds. Investments in direct plans of liquid funds touched Rs. 1 lakh crore in June 2013 from Rs 24,400 crore in March 2013. A large part of the shift in AUM in direct plans of debt funds is from institutional investors.

The AUM in direct plans of equity funds went up by 63% from Rs. 2,700 crore in March 2013 to Rs. 4,400 crore in June 2013.

Direct AUM

Equity CategoryJan - Mar 2013

Apr-Jun 2013

Direct Plans Average AUM (Rs cr.)27004400
Total Average AUM (Rs cr.)208600198600
Direct Plans as a % of total equity average AUM1.27%2.22%
Source : CRISIL (taken from cafemutual article)

If MF Utility offers ‘direct’ investing option, one can expect direct fund AUMs to increase sharply.

Mutual fund investing is not rocket science. In fact it is as simple as D .. I .. P.

D for discipline. I for interest and P for patience.

So go ahead and ignore all the experts who scare you about direct plans. They do so because they are scared themselves!

If you don’t feel confident about choosing and managing mutual funds on your own, choose a fee-only financial planner from this list. For a reasonable fee, they will offer you a comprehensive financial plan and you can invest in direct plans without any fear.

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49 thoughts on “Regular plan vs. Direct plan Mutual Funds: The story so far

  1. Srini IfaGalaxy

    Pattu, it is like telling a student that please learn yourself which better than to have a teacher. "Disclaimer I am IFA by profession"

    Reply
  2. Srini IfaGalaxy

    Pattu, it is like telling a student that please learn yourself which better than to have a teacher. "Disclaimer I am IFA by profession"

    Reply
  3. Srini IfaGalaxy

    Read it as - It is like telling a student please learn by yourself rather than being taught by a teacher.

    Reply
  4. Srini IfaGalaxy

    Read it as - It is like telling a student please learn by yourself rather than being taught by a teacher.

    Reply
  5. Srini IfaGalaxy

    Pattabiraman Murari may be you have had bitter experience in the past. Anyway I am happy to state currently those who are in this profession are quality wise better than what it use to be. If only advisors start advising based on clients bottom line rather than there own bottom line things are sure to change. Hoping for such changes in the coming days.

    Reply
  6. Srini IfaGalaxy

    Pattabiraman Murari may be you have had bitter experience in the past. Anyway I am happy to state currently those who are in this profession are quality wise better than what it use to be. If only advisors start advising based on clients bottom line rather than there own bottom line things are sure to change. Hoping for such changes in the coming days.

    Reply
  7. Srini IfaGalaxy

    Pattabiraman Murari that is the reason why i had put a disclaimer in my original post, if not me who will defend my clan. Finally, as u hv well said it is his money he has to take care, but i am sure hand holding is necessary for the novice to become a master. Not everyone are suyambu!!!

    Reply
  8. Srini IfaGalaxy

    Pattabiraman Murari that is the reason why i had put a disclaimer in my original post, if not me who will defend my clan. Finally, as u hv well said it is his money he has to take care, but i am sure hand holding is necessary for the novice to become a master. Not everyone are suyambu!!!

    Reply
  9. Srini IfaGalaxy

    Pattu it is progressing slowly, but steadily. Iam not sure whether u r aware that there are many ifa's who are recommending FMP's or liquid funds in a big way to many clients which pays them a very small fraction as commission/brokerage? These are very superior products on a tax adjusted basis comparing to FD's. Today any IFA will be able to survive only when he is adding value to his advice and also try to achieve decent returns to the client on a risk adjusted basis depending on the clients life goals. But iam sure more and more Pattu's will also help the advisor community to make the client pay for the advice there by making my clan to move from commission to fee based advisory.

    Reply
  10. Srini IfaGalaxy

    Pattu it is progressing slowly, but steadily. Iam not sure whether u r aware that there are many ifa's who are recommending FMP's or liquid funds in a big way to many clients which pays them a very small fraction as commission/brokerage? These are very superior products on a tax adjusted basis comparing to FD's. Today any IFA will be able to survive only when he is adding value to his advice and also try to achieve decent returns to the client on a risk adjusted basis depending on the clients life goals. But iam sure more and more Pattu's will also help the advisor community to make the client pay for the advice there by making my clan to move from commission to fee based advisory.

    Reply
  11. Kamat

    Good post. Thanks for sharing about MF utility. Once available, it will be interesting to compare it against the existing players like fundsindia, etc

    Reply
    1. pattu

      Thanks. Why bother comparing? What matters most is equity investors who stay invested. Only those can benefit from direct plans.

      Reply
  12. Kamat

    Good post. Thanks for sharing about MF utility. Once available, it will be interesting to compare it against the existing players like fundsindia, etc

    Reply
    1. pattu

      Thanks. Why bother comparing? What matters most is equity investors who stay invested. Only those can benefit from direct plans.

      Reply
  13. Pattabiraman Murari

    Why not? Especially when the board (SEBI) says it is perfectly fine! Many students have done very well on their own.
    I am not at all impressed with the quality of teachers I see anyway. There seems to be too many of them clueless about basic ideas of risk.

    Reply
  14. Pattabiraman Murari

    Why not? Especially when the board (SEBI) says it is perfectly fine! Many students have done very well on their own.
    I am not at all impressed with the quality of teachers I see anyway. There seems to be too many of them clueless about basic ideas of risk.

    Reply
  15. bharat shah

    thanks for the post. when common platform of MF UTILITY would be reality, it will be immense help to even existing direct plan mf investor, as we could start/switch to new fund from other AMC (not presently in our portfolio) without any paper work , i think. (except initial paper work to have account with MF UTILITY).

    Reply
  16. bharat shah

    thanks for the post. when common platform of MF UTILITY would be reality, it will be immense help to even existing direct plan mf investor, as we could start/switch to new fund from other AMC (not presently in our portfolio) without any paper work , i think. (except initial paper work to have account with MF UTILITY).

    Reply
  17. Pattabiraman Murari

    I am talking about the present. It is natural for you to defensive and be offended by my remarks. I expect nothing less.
    Point is, distributors and fee-based financial planners make mf investing a rocket science when it clearly is not for one simple reason: commissions.
    Practically no one in financial services in interested in financial literacy because they all have a finger in the pie. I am told all sort of things about investor behaviour and how I am impractical.
    I am impractical but, I realise that a majority of investors are idiots whether they seek professional help or not. They are clueless about goal-based investing and only think of returns.
    I am addressing only those who are willing to put in the effort and take control of the financial lives.

    Reply
  18. Pattabiraman Murari

    I am talking about the present. It is natural for you to defensive and be offended by my remarks. I expect nothing less.
    Point is, distributors and fee-based financial planners make mf investing a rocket science when it clearly is not for one simple reason: commissions.
    Practically no one in financial services in interested in financial literacy because they all have a finger in the pie. I am told all sort of things about investor behaviour and how I am impractical.
    I am impractical but, I realise that a majority of investors are idiots whether they seek professional help or not. They are clueless about goal-based investing and only think of returns.
    I am addressing only those who are willing to put in the effort and take control of the financial lives.

    Reply
  19. Pattabiraman Murari

    Agreed, "hand holding is necessary for the novice to become a master. Not everyone are suyambu!!!"
    The main problem for professionals is that investors are not recognizing that! If they did , mis-selling will automatically reduce, fee-based advisory will thrive and commission-based selling will reduce. There will be a natural carrot for IFAs to better equip themselves because the yardsticks for performance will be completely different.

    Reply
  20. Pattabiraman Murari

    Agreed, "hand holding is necessary for the novice to become a master. Not everyone are suyambu!!!"
    The main problem for professionals is that investors are not recognizing that! If they did , mis-selling will automatically reduce, fee-based advisory will thrive and commission-based selling will reduce. There will be a natural carrot for IFAs to better equip themselves because the yardsticks for performance will be completely different.

    Reply
  21. Pattabiraman Murari

    Yes I understand. Hope they soon insist on a fee for this value. Forget about me. I think this will become popular in the future as you say. I have one request/suggestion to the IFA community: Aggressively market this 'value' quantitatively and not with words.
    Excuse me for saying this, but I find even those who are formally trained in portfolio management do not seem to be doing this loudly enough.

    Reply
  22. Pattabiraman Murari

    Yes I understand. Hope they soon insist on a fee for this value. Forget about me. I think this will become popular in the future as you say. I have one request/suggestion to the IFA community: Aggressively market this 'value' quantitatively and not with words.
    Excuse me for saying this, but I find even those who are formally trained in portfolio management do not seem to be doing this loudly enough.

    Reply
    1. Ashal Jauhari

      Dear Rajan, so many blog posts here are generated from the discussion in our group. I'm really thankful to dear Pattu for giving such high weightage to group discussions.

      Thanks

      Ashal

      Reply
      1. pattu

        Ahsal, I should be thankful to you and group members. AIFW is as much a bloggers delight as it is an investors delight.

        Reply
    1. Ashal Jauhari

      Dear Rajan, so many blog posts here are generated from the discussion in our group. I'm really thankful to dear Pattu for giving such high weightage to group discussions.

      Thanks

      Ashal

      Reply
      1. pattu

        Ahsal, I should be thankful to you and group members. AIFW is as much a bloggers delight as it is an investors delight.

        Reply
  23. Sriraam Kalingarayar

    I am very bad with numbers. To understand in simple terms , how much difference in money are we talking about , between regular and direct plan , say over 20 years for a SIP of Rs. 5k every month ?

    Reply
  24. Sriraam Kalingarayar

    I am very bad with numbers. To understand in simple terms , how much difference in money are we talking about , between regular and direct plan , say over 20 years for a SIP of Rs. 5k every month ?

    Reply
  25. R Parikh

    Guess CAMS is also trying for directly investing in AMCs managed by them (which are quite many); further if one has existing folios most Fund Houses now have option of investing without PIN.

    Reply
  26. R Parikh

    Guess CAMS is also trying for directly investing in AMCs managed by them (which are quite many); further if one has existing folios most Fund Houses now have option of investing without PIN.

    Reply
  27. bazinga

    Is the MF Utility available yet? I am at the crossroads presently and conviniently sitting on the fence :). The reason being direct investing is appealing however has logistical issues (yeah I know its an excuse but its staring me in the eye now).

    Thanks for the article by the way - precisely what I needed when I was doubting if I was on the wrong path ???

    Reply
  28. bazinga

    Is the MF Utility available yet? I am at the crossroads presently and conviniently sitting on the fence :). The reason being direct investing is appealing however has logistical issues (yeah I know its an excuse but its staring me in the eye now).

    Thanks for the article by the way - precisely what I needed when I was doubting if I was on the wrong path ???

    Reply

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