What is Direct Plan of Mutual Funds(MF) in India? How to invest in “Direct Plan of Mutual Funds”?
SEBI, the market regulator has come out with one more investor-friendly measure from 1st January, 2013 ̶ Direct Plan of Mutual Funds. Earlier, SEBI was in the news when it abolished the Entry Load in Mutual Funds. Both these measures will help the investors in the long-term wealth creation. Let us see, what is Direct Plan of Mutual Funds?
Direct Plan of Mutual Funds – What is It?
Normally, you invest in Mutual Funds through any Mutual Fund Agent or a Broker. They will help you in selecting good funds, arrange for the documentation like Know Your Customer (KYC) etc. These agents are eligible for trail commission from your account every year. This is a small percentage of your accumulation. If you were investing directly without an Agent, the Fund Houses were saving on this Commission and the benefit was not passed on to the investors.
In 2013, SEBI directed all Fund Houses to launch a Direct Plan Option, so that investors who directly invest will be benefited by way of lower charges. By saving on these charges, there can be a difference of around 0.5% in the annual charges. This small reduction in charges can make a big difference in the long term. Since Mutual Fund investments are for long term, it will be better if you can invest in Direct Plan of Mutual Funds.
Direct Plan of Mutual Funds – Effect of 0.5% reduction in Expense Ratio
Suppose, you are investing Rs. 1 lakh Lumpsum in a particular Mutual Fund through an Agent. If the Fund is growing at a CAGR of 12%, you will get around Rs. 6,43,994 after 20 years, if the Annual Expense Ratio of the Fund is 2%. But, if you go for the Direct Plan Option of the same Fund, you will get around Rs. 7,12,993. Please check the chart below to see the difference. In simple words, you will get around 10% more in Direct Plan of Mutual Funds. The difference will be very high when you are investing through Mutual Fund SIPs for your long-term goals.
How to plan your Mutual Fund Investments?
For long-term goals, you can plan through Equity Mutual Funds. If you are planning to save for your daughter’s marriage after 20 years, Equity Mutual Fund is the ideal way. But, if you are saving for your retirement, which is just 5 years away, you can invest in Debt Mutual Funds. Equities will deliver good returns, if the timeframe of investment is at least 7-10 years.
Depending on your goals, time duration, you may select Equity or Debt Mutual Funds and can invest through monthly SIPs. You may invest in a mix of 2-3 Equity Mutual Funds, 1-2 Debt Funds as per your risk profile. It is ideal to go for goal-based savings, after quantifying your financial goals. The allocation towards equity has to be reduced as you are nearing the goals.
Can I go for the Direct Plan of Mutual Funds?
If you are capable of selecting the best performing funds and are capable of reviewing their performance, you can opt for Direct Plan in Mutual Funds. But you may have to allot quality time for this job. The other option will be to invest as per the recommendation of an independent Financial Planner or an Investment Adviser. But ensure that the Adviser is independent and is not selling any product. If you approach an Adviser who is also selling the Funds, he may recommend the Funds, where he is getting better commission.
Periodical review of the Fund performance is very important in Mutual Fund investing. But if you have an independent Financial Planner, he will do this on his annual review.
Can I afford to have a Financial Planner for investing in Direct Plan of Mutual Funds?
If you are investing Rs. 5,000 per month in good Mutual Fund SIPs, you can expect to get around Rs. 49 Lakhs after 20 years, assuming a 12% return. Your Agent will be getting around Rs. 1,70,000 in 20 years as trail commission on this. This translates into Rs. 8,500 per year for 20 years. If you opt for Direct Plan in Mutual Funds, this can be saved. If you are smart, you can engage an Independent Financial Planner by paying around Rs. 5,000 per year. He will guide you on all financial products and you can reach your goals easily.
How to invest in Direct Plan of Mutual Funds for better returns
From the above calculations, it is clear that opting for investing in Direct Plan of Mutual Funds is the ideal way. But, in the absence of an Agent, you may have to do a bit of paper work and the Form filling all by yourself. But, it is a one-time exercise which is really worth. You need to put a tick mark against Direct Plan while filling up the form and your investments will be in the Direct Plan of Mutual Funds.