This Year Make an Intelligent Choice: Invest in Direct Mutual Fund Schemes

Today I opened the HDFC mutual fund portal to make my monthly purchases. I was pleasantly surprised to find that the number of funds had doubled!

For example: HDFC Top 200  has a new sibling ! HDFC Top 200 Direct! The same is true of all other funds.

If an investor chooses the direct option no brokerage or commission  will be paid to fund distributors and the NAV of the direct scheme will be higher than the usual scheme. Over a long period of time investing in a good ‘direct’ mutual fund will provide higher returns than the ordinary scheme invested via a distributor.

Use this calculator to find how high expense ratios can impact your returns over a long period

Distributors are scared! Here is an article from  the director of FundsIndia who seems to worried about losing business! “Perils of investing in mutual funds directly”  Do be sure to ignore what is being said!

So why are distributors worried? Dhirendra Kumar, Value Research Online offers an insight!

Mutual funds’ direct plans will enhance investor returns: Value Research

What should investors like you and me do?

1.  Clearly understand why you are investing?

2. Choose a good fund. Use this guide for help if you need it.

3. If you a new investor choose the direct scheme without fear. You are likely to get a benefit of close to 1% each year. This benefit will compound to a significant amount in the long run

4.if you are an existing investor either with a distributor or are already investing directly in the old schemes like me, let us wait a while for some clarity about how the fund houses are going to handle the direct schemes. If you are holding a fund which is an underperformer then chose a good alternative and invest in it directly. A gradual shift to direct schemes is what I think is prudent. Since they are considered two different funds one has to be careful about

(1) increased exit loads! According to this story many fund houses have increases their exit loads fearing an exodus from the normal schemes to the direct schemes!

(2)  tax implications before one switches from an existing fund to its direct counterpart.

Lets wait and watch before we act.

Are distributors going to offer these direct schemes? Why would they! FundsIndia to their credit does offer Quantum MF schemes which was always a direct-to-investor mutual fund. I don’t think they can afford to offer direct schemes from every AMC. They may start charging a fee for advisory services.

What are you going to do?