Should We Switch To Direct Mutual Fund Plans? Calculate and Consider

Published: January 18, 2013 at 9:29 pm

Last Updated on

The answer is actually a no-brainer! Of course you should switch to the direct mutual fund plans. Need some convincing? Use a calculator and consider the the pros and cons …

Lets start at the very beginning  …

What is a ‘direct’ mutual fund plan? A MF purchased directly from an asset management company (AMC) from Jan. 1st 2013

What is a ‘regular’ mutual fund plan? A MF purchased through a distributor. All purchases made directly from the AMC before Jan 1st 2013 and all ongoing SIPs will be treated as ‘regular’ purchases

What is the difference between the two plans? In a regular plan, the AMC pays the distributor a loyalty fee known as trail commission each quarter. This is paid from the total assets under management and the NAV goes down proportional to the amount paid. In a direct plan this commission is not paid. Hence the NAV of the direct plan will be higher than the regular plan.

Note: Trail commissions are part of the expense ratio. (I earlier thought they were separate!) HDFC Top 200 direct plan has a 0.59% lower expense ratio than the regular plan as listed in their website (thanks to Anand for pointing this out).

Expense Ratio breakup

Say expense ratio is 2.5% or 250 basis points (bps). Here is a typical breakup:
100 bps goes to AMC fee (AMC pays upfront commission from this)
1 bps to trustees
10 bps to registrar and transfer agents
20 bps to operational expenses
3 bps custodians
80 bps distributor commissions
36 bps residual expenses (usually spent on end of the year advt!)
Large fund houses pay upfront commission from exit load corpus instead of AMC fee!

Source: Livemint article

Some history: In March 2012, months before the announcement from SEBI regarding direct plans, Anand Balakrishanan who blogs at Justgrowmymoney wrote about the impact of trail commission and how it affects direct investors. He even made a detailed spreadsheet to show how a trail commission of 0.15% each quarter can make a big difference and suggested ways to ensure direct investors don’t feel the pinch of the trail commission.  Kudos to Anand for highlighting this issue in his blog and in a conference of fund managers organized by Outlook Money.

Will the trail commission make a difference to returns? The short answer is Yes over a long period of time. Use this calculator/comparator to find estimate the difference in returns. Trail commissions are usually paid each quarter. For simplicity I have assumed this as an annual expense. The difference can be safely ignored as it is quite small (I checked with Anand’s meticulous spreadsheet which is no longer available).

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Download the Impact of MF Expense Ratio Calculator

Who should switch to direct MF plans? Anyone who cares about their money! Anyone who cares about their goals enough to choose investments after careful consideration.

Let us now ask an unpleasant question:

Who will not switch to direct plans? People who think filling up a form and applying to a mutual fund house in-person or even online is just too much work. Will you bet on such people to take care of their finances efficiently? Will you bet on such people to take informed decisions about the growth of their portfolio? Need I write it … Of course not!

Who should not switch to direct plans? Tempting to write people who don’t have make the time, have the patience, the inclination and therefore the knowledge to choose mutual funds, to rebalance their portfolio periodically etc. That would be too irresponsible and callous of me because if this lot does not manage their money who will for them? The distributors? Why should I bother with the answer to that question. Its their problem.

If that is not enough to convince you let us look at pros and cons of making the switch:

Pros: Higher returns of course. What is more important is a sense of control, responsibility and disciple in investing a switch can bring about in the retail investor willing to learn

Cons: None for a disciplined investor willing to continuously learn. For other kinds of investors … good luck to them!

Finally let us hear what Anand had to say about the switch in the Jagoinvestor Forum

The hurdles (to switching to direct plans) are listed as many but their impact is minimal:
1.Decide the investment category, plan, option on your own.
4.Track & rebalance your portfolio yurself.
– Independent distributors (including online ones) specify a particular portfolio of schemes based on risk capacity without taking into account individual circumstances. Thus they don’t help to track and rebalance either. Model portfolios based on risk taking capacity are available for free from several websites which can be used by individuals to invest directly.
2.Fill up investment form on your own
– One time activity. Any point in time you don’t need more than 4-5 schemes, so no big issues, IMO.
3.Visit RTA/AMC office to submit your forms for each redemption/ investment.
– Except a handful all of them are available for electronic redemption. Investment can be by ECS.

The advantages of Direct investing far outweigh investing through mediums for most people. Unless of course there is a distributor who can add individualized value-addition for investors

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  1. I would like to suggest that investors who rely on their expertise to manage money without distributors are always do it themselves….Regular Funds are for those are otherwise….

    1. Sir,
      I agree with the general spirit of that idea. However most investors use that as an excuse to do nothing. They neither do it for themselves nor will they seek professional help from a planner and pay for services. They will base their decisions on fund ratings without knowing if the funds are suitable for them or not. Investors should use this opportunity to switch and take control of their finances.

  2. Even after my SIP is completed in a regular plan (and I do not make further investments in a scheme) but retain the MF units in my portfolio, do I not continue to lose on account of a lower NAV of the regular plan? The NAV of the regular plan will continue to factor in the trailing commission for the benefit of the agents and distributors and hence will continue to be lower even after I cease to make further investments but continue to hold the MF units in my portfolio. This additional loss (which is but obvious) is not highlighted in your “direct plan versus regular plan comparator” but perhaps merits mention as well. Am I right, sir?

    1. Dear Kapil,

      Yes you are right! To see the difference this makes using the comparator, use the SIP part first and find the corpus. Then use the corpus as input for the lumpsum part. Of course you need to do it twice!

  3. Hi Pattu,

    The fund houses(except Quantum which has a very simple user interface) are still getting things in place and it may take some time and i would want to see what is the reduction in expense ratio for direct. I personally use Fundsindia since it was zero charge compared to ICICI. I agree to all the above points, there are some advantages which may be worth having single window view (and maybe cost associated). 1> One stop purchase (i have 3-4 funds from different fund houses). 2> Ease of use helps my wife understand and actively participate in the equity investing process (if i tell her to login to 5 different sites and remember passwords for each she will quit before starting). 3> I am assured if something unforseen happens she knows complete portfolio of ours.


    1. Fine Vijay if you are clear about what you want to do. Great. The difference in expense ratio is expected to be at least 0.5%.
      At present I can see the NAV difference steadily increasing.

    2. Dear Mr Vijay ,
      The FundsIndia account is not actually free, after all they are not your relatives to provide it free of cost , or any social workers! Nothing come for free right. Then what is the catch , they get trail and upfront commissions from your investments. If they have not disclosed that to you its illegal in first place. So its costing you the advisory fees that is there. Now that you know that you are paying advisory fee , better look for one , within your acquaintances , who works for you rather than the fund houses. All the best.

  4. Sir,
    We need folio to register in any AMCs website. That means a new investor can not invest directly thru AMCs website. Why this? I have not invested in SBI MF in past and I want to invest now. For that I purchased units thru fundsindia first and then register in SBI AMC website thru new folio.
    Please tell me how to invest directly thru AMCs for first time. I have to guide my friends, Otherwise I have to make them open account in FundsIndia first and start investing and then register thru AMCs websites thru their new folios.

    Please help

    1. Unfortunately there is no uniformity among AMCs reg this.

      For UTI and quantum you can do it online (if KYC compliant). For many other you need to send documents to AMC office by courier

      FundsIndia will help if a person does not want to do all this work!

    2. I was exactly in the same situation as you! I had to deal with 4 AMCs. I filled in two forms:
      1) Common Application Form
      2) SIP registration form
      The only additional documents required were my KRA-KYC acknowledgement and a blank cancelled cheque for subsequent ECS payments.

      I went directly to their branch offices in Mumbai for submission of the forms. To fill in the forms, I took help of the customer-care numbers of the AMCs.

      My SIPs start 30 days after the SIP forms were submitted. This requires me to be patient.
      I did not invest through websites but filled in the forms and submitted them physically. This initial work done, subsequent investments and interactions with the AMCs should be easy.

      I hope this helps but I have assumed you have the branch offices of the AMCs in your city.

  5. I have another doubt. It seems we can invest in any number of funds in existing folio. But if we want to invest in new folio (though we have one existing folio and have login ID and Password) for tracking seperate goal oriented portfolio or for any other reason, still we need to register as new user thru AMCs Websites. Ofcourse, we can map new folio after login.
    Am I correct? That means, AMC will not allow two folios for single investor.
    Please clarify

  6. Dear Sivaprasad, In all my schemes, I have more than one folios! I did not use the existing folios which were created when I was investing through ICICI Direct (which, of course I could have used even for investing in the “direct plan”. I applied for new folios, in the very same schemes, while applying directly with the various AMCs. In general, we can have as many folios for even the same scheme of a Mutual Fund. If your doubt still persists and is specifically regarding usage of the website and online access if there are more than one folios, I can check and inform tomorrow….do let me know if you need any assistance from me. Thanks.

    1. Dear Kapil,

      Please tell me how to create second folio thru AMCs Websites. Even after creating do we need another login ID and password for new folio. I think,for Quantum, they will ask for another login ID and password while creating new folio.
      I will wait. Thanks for your concern.

      Thank You

  7. Dear Sivaprasad,
    The AMC gives one login id and password for each individual folio. The login id and password of the old folio will not be valid for a new folio, even if it is for the same MF Scheme. So, a single investor can have multiple login id for the different folios that he has. Of course, if the name of the investor is exactly identical in two folios, the second folio can be ‘mapped’ in the “login account” related to the first folio. Some AMCs allow even the folios of family members to be “mapped in”. So, while you log into one account, you can monitor the other folios of your family members as well in the “family account” section. Though different AMCs follow different procedures, the general rule is that for each folio, there will be one login id and password. Thanks/Kapil Tiwari

  8. I have some questions below:
    1.Please suggest me any two MF from below funds for the long term:
    a)SBI Emerging Business(G)
    b)Quantum Long Term Equity Fund
    c)Reliance Equity oppurtunities Fund
    d)ICICI Prudential Discovery Fund
    e)HDFC Equity Fund(G)

    2.Should I invest through SIP say 5000 pm.
    3.Should I invest in two MF inspite of one considering the risk.
    4.Is there any application charges for the MF.I come this term when I saw the ICICI MF and Reliance MF links.
    5.Is SBI MF is different with others as it is of SBI a govt bank.
    6.Do I need to mention the investment years say 5 years for the MF investment while purchasing or I will be asked by the AMC while renewal after each year .
    7.Should I buy the MF for one year and then renew after each year.

    Thanks & Regards,
    K C Rana

    1. Dear Rana,
      I would pick b,d and e.

      2.Should I invest through SIP say 5000 pm.
      Yes. Go with direct plans. That is buy from AMCs.

      3.Should I invest in two MF inspite of one considering the risk.
      You should invest in at least one large-cap fund (HDFC equity or Top 200) and one small- and mid-cap fund (ICICI Discovery, IDFC premier equity)
      Quantum long term is a mix of both

      4.Is there any application charges for the MF.I come this term when I saw the ICICI MF and Reliance MF links.
      No charge to apply and start investing. I am invested with ICIC and I did not pay anything

      5.Is SBI MF is different with others as it is of SBI a govt bank.
      SBI MF is owned by 63% by SBI rest by AMUNDI a french AMC

      6.Do I need to mention the investment years say 5 years for the MF investment while purchasing or I will be asked by the AMC while renewal after each year .

      You can and must mention 5 or any duration.

      7.Should I buy the MF for one year and then renew after each year.

      Choose a MF with a good track record (all of the above are) and invest for say a 2-3 years. If the performance sags you can always shift. Each year may mean more paperwork more often

      1. Hi Pattu,
        I often visits money control and see many schemes on rank basis.
        So should we always try to invest in rank 1 schemes as mentioned in the website….is there any benefit of this ranking……
        what should be the criteria while choosing the scheme for long term say 10 years investment.


  9. Dear Pattu,i have one question…my income is not regular so whenever money is collected i put in lumpsum then start weekly amount is variable…so how do i know that which of my STPs is on?? this investing style ok???…thanks

    1. I think its quite fine. As long as there is consistent inflow to investments. Not sure what you mean by “how do i know that which of my STPs is on” though.

  10. Hi Pattu
    Correct me if i am wrong.
    It is not advisable to move the investments which are less than one year old from normal plans to Direct Plans. The exit load will be 1% if redeemed/switched out with in 1 year time period. You can wait for 1 year time period in normal plans and by doing so the returns will be 0.5% lesser as compared to 1% exit load when redeemed/switched out to another fund.


  11. Hi Pattu,
    I need your crucial help…..I have invested 50k in SBI Gold Fund….which having value of 45k now.
    As Gold is not seeming to shine….I want to make some deceisions:
    1)Should I switch from SBI Gold Fund to SBI FMCG or SBI Magnum Equity with all amount(44.5k) after loss of 5.5 k approx.or should I opt SWP
    2)Or should I not redeem the SBI Gold Fund.
    3)Or should I invest in other funds….
    Great Confusion……Can you please suggest any fund/stock for recovery(I am fine to take risk for this)…


    1. Chandan,

      if the 50K was only recently invested in the gold fund you have two options:
      1. If you can take the loss of 5.5 K just shift in one go
      to SBI magnum equity. You could shift on a day like today when the sensex drops by 1-2%

      2. shift from the gold fund to magnum equity, not the entire amt by just enough so that gold forms only 10% of your portfolio

      1. Pattu
        thanks for your kind suggestions…….
        1) 10% of portfolio means 10 % of (total amount in FD + Saving Account+ MF investment)???
        2)I have started SIP 3 months back in large cap+Mid Cap+Small Cap funds with 40+40+20 ratio….Is SBI FMCG a sector based fund having 41% investment in ITC…. not a good option as it has very low NAV now a days ???….

        1. 1) 10% of portfolio means 10 % of your investment (total amount in FD +MF investment). SB acc not incl.
          2) SBI FMCG is a sector fund. You need to stay invested for a looog time to see go returns from any MF investment.

      2. Hi Pattu,
        I am also stucked in the gold fund …..I have also invested 40k in gold fund for long term as I was new to market and I considered Gold will always have good returns…should I also redeem the units though gold is at 24,900 …Not able to daring the loss of 6k :(…….should I wait…is ther any scope of gold to reach atleast 27k…or will it go down further…..Please suggest me..

  12. Hi Pattu,

    Thanks for all your comments which you have put on various financial site e.g. jagoinvestor & freefinancial………I need your help in fund selection.

    I want to invest 8k monthly on MF SIPs for long term.
    Till now I have only started SIP of 3k in SBI Emerging business Fund.
    I have also invested 9k in Quantum MF (not have SIP 3k/month ) till now.
    I want to add one of the below large cap fund to my portfolio:
    1.Franklin India Bluechip(my choice till now)
    2.DSP BlackRock Top 100 Equity
    3.SBI Magnum Equity Fund
    4.ICICI Prudential Top 100 Fund
    5.HDFC Top 200

    I want to readjust my investments SIPs as:

    1. Large Cap e.g. Franklin Bluechip – 3500
    2. Mid Cap i.e. Quantum MF – 2500
    3. Small Cap i.e. SBI Emerging Buss – 2000

    Please tell me if all the investments & amount are ok or not.

    Thanks & Regards,
    K C Rana

  13. Dear Pattu, this was my first encounter with a personal finance calculator. That was in January 2013. I must tell you that today:
    1) I can fill up a common application form plus an SIP registration form.
    2) I can go to the various AMC offices.
    3) All my MF SIPs are in direct plans only….!!

    Many thanks!!

    1. I think you mentioned this earlier. Very generous of you to mention my calculator along with your actions. Credit for your actions rest with no one else but you.

  14. After reading this article i will open my account directly with AMC as soon as possible. I hope same is true for liquid MF or DEBT Funds.

    1. Thanks for reading. You can invest in any kind of fund with a single account. Opening the account is a one-time chore. After that, it is very easy to transact.

  15. Very good information and calculators for helping people to invest wisely and successfully. Both style and substance are exceptional
    I have your blog on my reader so that any new posts come up automatically.

  16. How does one go about switching from Regular to Direct plan? I have sent an email inquiry to the fund house contact listed on their website, but have yet to receive a reply.

    Much appreciate your calculators. Have been using quite a few of them. It would be nice to also see the formulas you use. If you can post them too along with the posts, that’ll be very educational as well.

    1. Thank you. All the formulae used are available in the sheets. Not many readers would be interested in them. To switch from regular to direct funds, get an online account with your folio no from the AMC. Login and make a switch to direct funds. Take care of exit loads and tax.

  17. Pattu, I am a regular reader of your blog.Very useful info. I just switched my 3 MFs from regular plan to Direct plan. Thanks.

  18. I have an account with Fundsindia but I have not started investing yet. I plan to go the direct way. But where will I get the KYC acknowledgement as it was done by Fundsindia ?

  19. I have been considering moving to direct mutual funds since a very long time. However, I had several doubts and queries that prevented me from taking a decision. This article throws light on all the different facets of a direct mutual fund. Thanks for sharing this piece of information.

  20. Nice commentary . I was fascinated by the info – Does anyone know if my company could acquire a template a form example to fill in ?

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