What are Direct Plans in Mutual Funds

We have all heard of mutual funds and the benefits they provide. Many of us have been approached by an agent or a Distributor who offers to sell us mutual funds. Here from January 1st 2013 Asset Management Companies have to mandatorily introduce direct plans for all mutual fund schemes. It is but obvious that the distributor would not mention this to us unless asked. Let us consider a Distributor has an HNI client who puts in a few crores into Equity Schemes of a mutual fund in a year. Imagine his predicament when the direct plan in mutual funds comes in. He will lose a few Lakhs in commission. Here as we do not route our mutual fund investments through a Distributor, commission expenses to these are eliminated and the expense ratio of the mutual fund is lesser. This means in a direct plan we get a higher return from the mutual fund which might have the same portfolio investments as a normal plan. In order to improve the options of investors who do not prefer the role of Distributors SEBI has asked AMC to launch direct plans from January 1ST 2013. Don’t we all want to manage our investments ourselves if possible? Won’t we all be proud of ourselves if our own investment decisions yield good returns? I would like to remind all of you that the team of Financial Planners at IndianMoney.com are always there for you to plan your Financial needs in a most efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111.

So What Are Direct Plans In Mutual Funds?

So what is the expense ratio

Here we divide the mutual funds operating expenses by assets under management to get expense ratio. This expense ratio gives us an idea of how much of the fund’s assets under management are used as expenses.

So How Does the Introduction Of Direct Plans Help Us Monetarily :

A particular mutual fund house has a direct mutual fund plan for clients who directly invest in these schemes. Here as the Distributors Commission has been scrapped the expense ratio is lower from say 2.5% to about 2 % for these direct plan schemes. These look like very small percentages .But are they really such small amounts. Here Mr. Rajesh invests a sum of INR 6 Lakhs under the direct plan of a mutual fund scheme. He stays invested for a period of 5 years. This fund generates a return of 9% per annum on an average. Here after 5 years this amount would be INR 9,23,174. Let us assume that Mr Rajesh had gone through an agent or a distributor where he was charged a commission. This might have increased the mutual fund expense ratio by about 0.75%.His returns after 5 years would have been about INR 8,91,847. Here the difference would be around INR 31,326.This amount is saved through the direct plan. If you want to learn more about mutual funds please look up the website IndianMoney.com.

Impact On Net Asset Value of a Mutual Fund :

Here NAV is basically the value of all the securities in the mutual fund portfolio calculated on a daily basis. From this all expenses are deducted and the resultant value is divided by the number of units in the fund is Net Asset Value. Here if the expenses are reduced higher would be the Net Asset Value. Here a direct plan has a NAV which might be 0.5-1.0% higher than the corresponding normal mutual fund scheme .On an amount of INR 50 Lakhs this would translate to about INR 30000. The amounts would sizably increase with the passing of time.

How To Invest In A Direct Plan :

Who Should Invest In Direct Plans :

Who should Not Invest In Direct Plan?

Here I would like to end this article on a note that in this case SEBI may have come up with a clincher in the mutual fund industry and we need to see if this leads to better gains and benefits to the Overall Mutual Fund Sector.