In January 2013, exactly 10 years ago, the mutual fund industry started the direct plan in its schemes following market regulator SEBI’s diktat. Unlike the regular option, the direct plan paid no commission to any intermediary such as a distributor, which has resulted in significant reduction in expense ratios of funds and for most part ensured better returns – much higher in some cases.
The difference in the expense ratios of regular and direct plans ranges from 50-60 basis points at the lower end to as much as 150-180 on the upper side. A basis point is a hundredth of a percentage point. Whether for lump-sum investments, and more so for recurring SIPs (systematic investment plans), the final amount can be substantially higher in the case of direct plans. Here are the details of how returns across key equity and hybrid fund categories vary among the two plans, and how the 10 best SIPs delivered. Finally, we also sound a note of caution for inexperienced retail investors who wish to jump in and go direct without guidance.
How SIPs and fund categories delivered
When returns of key fund categories are considered over the past 10 years, small caps have had the maximum difference between direct and regular plans, at 189 basis points, while flexicaps have a difference of only 55 basis points. For others, it varies from 77 to 126 basis points.
What makes the picture clearer is the additional returns investors make while deploying sums via SIPs on direct plans. The top 10 funds by their SIP returns on regular plans have been considered for the purpose. These are not recommendations.
A ₹10,000 per month, 10-year SIP in SBI Small Cap fund’s direct plan would have made you ₹3.27 lakh over the direct plan, while it is ₹3.11 lakh for Kotak Small Cap. Indeed, across the 10 SIPs that we have taken the additional amount that you would have from your investments over the decade would range from ₹1.68 lakh to ₹3.27 lakh. These are very large sums that you garner and can even be earmarked for another small goal itself or even to pay capital gains tax.
Why MFDs and investment advisors are still important
From the numbers above, it may be tempting for many retail investors to rush towards direct plans of mutual funds by choosing schemes on their own. But such a move may prove costly.
There is every chance that do-it-yourself (DIY) investors who are new entrants to the markets may end up choosing an unsuitable scheme. Or, they may go by recent returns and select schemes without analysing their performance consistency and suitability for their own portfolios. Then, there is the critical aspect of where a mutual fund fits in the overall asset allocation.
As a result, at the first signs of a fund’s underperformance, they would exit the scheme or stop SIPs. Data from trade body AMFI indicates that only 44.3 per cent of the mutual fund industry’s equity assets remain invested for more than two years.
Most retail investors may not have the time, expertise and inclination to make an in-depth analysis of their investments.
Therefore, mutual fund distributors — who can handhold investors — still play a fairly important role. In the quest for saving on the commission, you could end up choosing the wrong scheme and suffer sub-par returns, which, in turn, can seriously hurt your financial goals.
Those wanting to go direct can take the guidance of Registered Investment Advisors (RIAs) for impartial advice on choosing the right schemes. For a fee, you can get your overall financial planning and investing done in a smooth manner with RIAs.
DIY investors will also find unbiased investment analysis from businessline’s Portfolio section useful for their decision-making process.