From January 1, 2013, the SEBI has made it compulsory for funds to provide a direct plan, which will have a lower expense, in each fund. In less than two years (as on September 30, 2014), direct plans account for 29 per cent of the total mutual fund assets. However, the aggregate shift doesn't reveal the true picture.
Investors in liquid funds (liquid and ultra short-term funds) were the first to embrace direct plans. In the first quarter of 2013, 18 per cent of liquid funds moved to direct plans. This percentage has steadily grown to 41 per cent of the total assets now. This remarkable shift can be attributed to the short-term nature of the investments in liquid funds. Hence, new investments were made in direct plans. Also, the dominance of corporate investors in cash funds also helped. Sophisticated investors investing large amounts for short periods in a liquid fund will find it difficult to justify the lower returns of regular plans. The difference in the returns of the regular and direct plans of a liquid fund can range between 0.05 and 0.53 per cent.
All other fixed income funds and dynamic bond funds (FMPs excluding liquid funds and ultra short-term funds) have also steadily gone up from 8 per cent in the first quarter to 39 per cent by September 30, 2014.
The shift towards the direct plans of equity funds was slow. It was just 1 per cent in the first quarter of 2013 to about 5.3 per cent by September, 2014. With the revival of interest in equity funds, the direct plans of equity funds are finding takers. The percentage of money flowing into direct plans may not look large but when seen in relation to the new money flowing into equity funds, the inflows may be quite sizable. The difference in the returns of a regular and a direct plan of an equity fund can range between 0.9 and 1.35 per cent.
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