Direct plan mutual funds have proved to be a great way in which informed investors can build a low-cost portfolio and suitably take advice too. This is visible in the growth numbers too. But the evolution of direct plans are also facing certain myths these are in the concept & processes. So I thought to share some of these myths and debunk them.
A couple of months ago I was at a meet where Mutual Fund agents were also present. As they all know I promote direct plans, one of them asked me – My investors do not know about Direct Plans. How come you get so many clients for direct plans?
I answered “This is your mere imagination that your investor does not know about direct plans in the era of technology & awareness. In case my investor does not know about them, we make sure to tell them about Direct Plans. We have many pages/articles on it on our website”. So what’s the point in hiding?
This is the main problem. The concept is purposely hidden by the intermediaries. If some investor hears it from some friend or media and discusses with his agent/advisor – the agent shuts him off by making certain excuses.
We all know direct plan mutual funds have no commissions from the manufacturers- mutual funds. So basically, the agent does not want to or cannot charge fees from the investor. But these reasons spread a lot of rumors around Direct Plans.
As per a Securities and Exchange Board of India (SEBI) circular dated September 13, 2012. Mutual Funds/AMC have been mandated to provide a separate plan for direct investment, i.e. investments not made through commission distributors in existing and new schemes.
So here are some of your doubts cleared and myths debunked:
Direct Plan Mutual Funds are separate scheme and managed as separate portfolio
No. Portfolio-wise direct plans have the same holdings that a regular plan has. The scheme remains same and there is absolutely no separation. To understand regular and direct so new plans changed like this:
So, earlier with regular plans, the scheme had 3 options now they have increased to 6 option. The funds remain same.
Direct Plans Mutual Funds are new. So let them prove something.
As the portfolio and fund remain the same, the Direct Plan is as old as the fund’s age. So if we are comparing HDFC Equity Fund Regular plan with Direct the fund inception is same. Only the direct option (start of new NAV) started in Jan 2013. So only the returns of 5 years plus are not available as Direct plans are still to complete 5 years of inception.
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So, in case you want to see the historical performance, the regular plan performance is the only option as no other plans existed. Also, this is logical as fund history is same.
Performance data of DSP BR Small & Midcap Fund- Both Regular & Direct Options
The direct plan’s NAV is more, so invest in Regular Plan that has low NAV.
Direct Plans NAV started from Jan 2013. The base NAV was the regular plan NAV. So on 01, Jan If a fund had NAV Rs 50, the base was fixed RS 50.
Now, Direct Plan will have lower expense ratio (excluding distribution expenses, commission etc.). The plan shall have separate NAV.
Since the expenses were saved these remain in the fund. The cost benefit has helped the direct plans have more NAV than the regular counterpart.
Now after 4.5 years the gap has widened. See for yourself.
And you know the NAV grows in percentages and not numbers. Illustration:
NAV in Regular Plan is 40.45
Nav in Direct Plan is 42.67
So if a fund has 20% growth, NAV after one year will be:
NAV in Regular Plan 48.54
Nav in Direct Plan is 51.20
Hence NAV has no bearing on the fund performance. So if someone is asking you to invest in Low NAV fund or option- he is mis-selling.
My advisor says he is not “allowed” to offer Direct Plan Mutual Funds
This not true. He is allowed but since he will not get remuneration on them from the Mutual Fund, he says he is not allowed. The way is he can charge advisory fees (like we do) and can make investor invest through direct funds.
But he is not ready to break shackles. He twists the conversation that he is not allowed. The poor investor feels challenged to reach out directly or he gives weight to the old relationship. So he continues with regular plans.
Advisors cannot give “Services” for direct plans.
Many advisors say they cannot service direct plans because when “DIRECT“ is used in the form, the mutual fund does not recognize the advisor. So he basically says “he cannot give you post-sales service” if you invest in direct. He cannot make a portfolio or his system does not accept DIRECT DATA.
The truth is – MF forms have space for both ARN (Mutual Fund Agents-Commissions) and RIA (SEBI Registered Investor Advisors- Fee-Based).
For online transaction also the platform is separate and RIA number is captured.
Getting a RIA code involves giving up commission practice and eliminating Conflict of Interest. It also involves submitting to regulators a constant scrutiny of advisory process build for investor’s benefit. Also once you take on RIA code previous brokerage is stopped. So it is easy to say “we cannot service Direct Plans”.
Also to tell you one more truth. Direct Plan Advisors are given same treatment as a normal advisor for recognition of their business from Mutual Funds.
We regularly get data from them which we upload in our software and provide regular service to investors under Direct Plan.
Converting from existing/regular plan and converting into the direct plans involves huge tax outgo & operationally difficult?
Nothing will happen automatically. Yes, you can change it from regular to direct. Just tell your advisor to do it as he will take care of exit loads and taxation.
Investors desiring to bring the existing investment under the direct plan may do so by submitting a normal switch request.
The folio remains same and folio can contain both Regular Plans & Direct Plans.
The switches may attract capital gains & exit loads. It needs to be dealt by your financial planner/tax advisor as Mutual Funds taxation allows for certain benefits as per scheme (Equity or Debt) invested.
Hope the article solves your queries on direct funds. If not- mention your question in the comments section below or email me. I request to please forward the article to your family and friends to spread the awareness.