The direct vs regular fund choice appears simple but there are some complexities
18-Nov-2021 •Dhirendra Kumar
The difference in returns between the direct and the regular plans of the same mutual funds has now become so large that it's impossible to ignore. Except, of course, for investors who still do not know anything about direct plans at all. For knowledgeable investors, i.e., most of those who will be reading this page, it is inexplicable that there is, even now, any money at all in regular plans.
How could there be any mutual fund investors still out there who don't know that there is a simple way to increase their earnings from any equity fund by 10% or so by just choosing a different plan? And yet it's true. Direct funds account for just about 22% of the total money that is being held in Indian equity funds. The rest is still held in regular plans and those investors are still leaving money lying on the table for others to pick up. The percentage is much higher in debt funds but those are mostly used by professional corporate investors, so the story is different.
The thing that the knowledgeable direct fund investors do not realise is that unless you go out and look for it, there is no way that you will come across information about direct funds by yourself. I mean you will see references to the word 'direct' here and there but the actual financial implications are almost entirely secret. For those who have been comfortable in the way they invest, through a distributor large or small, and who perhaps google funds once in a while or even visit fund companies' websites, there is no way to discover the exact nature and quantum of the returns advantage that you will get through direct funds.
Except for some of the new fintech platforms, or investor-oriented sources like Value Research Online, the advantage of direct funds is a secret. How much of a secret? Here's a little taste. I'll take the example of one typical middle-of-the-road large-cap equity fund that I picked on Value Research Online. If you had invested Rs 10 lakh in this fund's regular plan seven years ago (the longest period for this fund), it would have grown to Rs 23.2 lakh. The same investment in the direct plan would have grown to Rs 25 lakh. The gain of Rs 15 lakh is 13.6% higher than the gain of Rs 13.2 lakh. Same fund, same portfolio, just a different plan. Obviously, over longer periods, the differential can only grow - that's a mathematical certainty.
Clearly, direct plan fans are justified in being puzzled that most people refuse to take this money. Of course, a straight comparison between direct and regular plans is somewhat unjustified in some aspects. Direct and regular plans are suited for different kinds of investors. At Value Research Online too, we rate them in separate sets even though you can use our free tools to compare them with each other.
Beginner investors need simple convenience services to facilitate the transactions. Even more than that, beginner investors need someone to get them started. Unlike a fixed deposit in a bank, a mutual fund investment is not simply an automatic extension of some services you are already getting. Being too focussed on the last sliver of cost may mean that you never actually get started.
So what kind of an investor would be suited for direct investments? That would have to be someone who understands what kind of mutual funds are needed for different kinds of investment needs, is capable of researching these independently and come up with a list of funds to invest in, and then go through the process of actually investing without the help of an intermediary. After one starts investing, whenever the markets fall and investment values come under pressure, an external source of advice can help one stay the course. Essentially, you have to do for yourself everything that an advisor is supposed to do.
There is no universal correct choice - each investor has to figure out what they can do, and what they need someone else to do for them, and figure it out.