Till last year,if you had decided to invest in a mutual fund (MF) scheme,you would have had to either approach the office of the AMC,its website or your financial adviser.However,from circa 2013,market regulator Securities and Exchange Board of India (Sebi) mandated fund houses to provide a separate plan for direct investments,that is,not through a distributor,in existing as well as new schemes.
Let us take a look at these plans,which came into being from January 1,2013,along with the regular plans,which have become distributor plans.
For investing in direct plans,an investor needs to invest directly with the fund house (physically or online) or at authorised investor service centres of the fund house.In the application,the investor needs to mention Direct in the ARN Code section.The money will thereafter be invested in the dedicated plan of the scheme for such investors.
For investors who use the services of an intermediary,such as a distributor,financial adviser,bank or online portal,the money will be invested in the regular plan of the scheme,along with a mention of the ARN Code of the intermediary.
A major difference between direct and distributor plans is that,by design,they will have separate net asset values (NAVs).In particular,direct plans will have a lower expense ratio compared to their counterparts.This is because direct plans exclude distribution expenses,commission and other similar costs and,further,no commission is paid from these plans.Simply put,such plan pools are treated as separate from the ones accumulated via distributors to which commissions and distribution charges will be applicable,thus requiring a separate NAV.
In effect,investors in these newly minted plans are being rewarded for making efforts for selecting their schemes and approaching the fund house directly to invest.It is important to note,however,that the portfolio of both the plans will remain the same.Lets take an example to elaborate on the point made above.For equity schemes,expense ratios can differ from anywhere between 25 to 100 basis points (100 basis points = one percentage point).This gap in expense ratio will be lower for debt schemes.
Now,say investor A invests a Rs 10,000 lump sum in an equity schemes direct plan which gives him a return of 15% annually.Over 15 years,this would amount to Rs 81,371.Another investor Z,who has invested in the same scheme,has done so through the distributor plan.As a result,he bears an expense ratio which is higher than that of the direct plan by 50 bps.Thus,in the same period,he will earn lower returns (14.5%),which would amount to Rs 76,222,a difference of 6.33% between the resulting amounts of both plans.
From the above,it may seem that investing via direct plans only is the smart way to invest,but this is not necessarily so.You need to remember that to invest in these plans,you need to have had shortlisted your preferred scheme before you go to an AMC office or website or ISC.With 44 fund houses offering thousands of schemes,this is certainly not an easy task.You will need to put in time and effort in doing research for creating your short-list of schemes.
Seasoned investors can opt for this route given their experience in investing in mutual fund schemes,but for new investors with little investment experience,visiting an adviser may be worth the extra return forgone.Apart from providing advice,the adviser will also manage your money,thus saving you the effort of going to the AMC physically.
However,it is important to choose your adviser wisely,because the adviser himself/ herself may end up making all the difference between superior and average returns in your fund portfolio.
Let us take a look at these plans,which came into being from January 1,2013,along with the regular plans,which have become distributor plans.
For investing in direct plans,an investor needs to invest directly with the fund house (physically or online) or at authorised investor service centres of the fund house.In the application,the investor needs to mention Direct in the ARN Code section.The money will thereafter be invested in the dedicated plan of the scheme for such investors.
For investors who use the services of an intermediary,such as a distributor,financial adviser,bank or online portal,the money will be invested in the regular plan of the scheme,along with a mention of the ARN Code of the intermediary.
A major difference between direct and distributor plans is that,by design,they will have separate net asset values (NAVs).In particular,direct plans will have a lower expense ratio compared to their counterparts.This is because direct plans exclude distribution expenses,commission and other similar costs and,further,no commission is paid from these plans.Simply put,such plan pools are treated as separate from the ones accumulated via distributors to which commissions and distribution charges will be applicable,thus requiring a separate NAV.
In effect,investors in these newly minted plans are being rewarded for making efforts for selecting their schemes and approaching the fund house directly to invest.It is important to note,however,that the portfolio of both the plans will remain the same.Lets take an example to elaborate on the point made above.For equity schemes,expense ratios can differ from anywhere between 25 to 100 basis points (100 basis points = one percentage point).This gap in expense ratio will be lower for debt schemes.
Now,say investor A invests a Rs 10,000 lump sum in an equity schemes direct plan which gives him a return of 15% annually.Over 15 years,this would amount to Rs 81,371.Another investor Z,who has invested in the same scheme,has done so through the distributor plan.As a result,he bears an expense ratio which is higher than that of the direct plan by 50 bps.Thus,in the same period,he will earn lower returns (14.5%),which would amount to Rs 76,222,a difference of 6.33% between the resulting amounts of both plans.
From the above,it may seem that investing via direct plans only is the smart way to invest,but this is not necessarily so.You need to remember that to invest in these plans,you need to have had shortlisted your preferred scheme before you go to an AMC office or website or ISC.With 44 fund houses offering thousands of schemes,this is certainly not an easy task.You will need to put in time and effort in doing research for creating your short-list of schemes.
Seasoned investors can opt for this route given their experience in investing in mutual fund schemes,but for new investors with little investment experience,visiting an adviser may be worth the extra return forgone.Apart from providing advice,the adviser will also manage your money,thus saving you the effort of going to the AMC physically.
However,it is important to choose your adviser wisely,because the adviser himself/ herself may end up making all the difference between superior and average returns in your fund portfolio.
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