The Hindu Business Line recently had an interesting article on Direct Mutual Funds that you can read here. They studied over 632 mutual fund schemes across classes (equity, debt, hybrid), for their returns since January 2013 and found this!
Summary of the article on Direct Mutual Funds
1. Direct plans are outperforming regular plans in all schemes. Long-term investors in mutual funds can enjoy relatively better returns by choosing direct plans that have lower expense ratios.
2. It is important to pick the ‘right’ fund that manages to outperform its peers on a consistent basis
Here is where Jama helps by suggesting curated funds
3. On an average, the difference in expense ratio between regular and direct plans for funds with a large corpus in equity-oriented funds, was close to 80 basis points (bps) which is 0.8%.
Note that many ‘popular’ funds have a higher difference. eg: ICICI Value Discovery has a difference of about 130 bps
4. In the equity-oriented fund category, the difference in returns was 6 per cent on an average over the last four years for schemes with corpus exceeding ₹4,000 crore.
5. The difference in the expense ratio between regular and direct plans was lower for debt funds than their equity counterparts. However, the difference in returns due to lower expense ratio is significant for debt funds where returns tend to be relatively lower.
6. The longer term return in direct plans was found to be higher, all thanks to the power of compounding.
This is very important; what you save by cutting down commissions is left for you to compound.
How can I buy Direct Mutual Funds?
Many distributors will scare investors that direct mutual funds are difficult to buy on your own. Or that there won’t be any advisor to help you out. This is blatantly false and propagated with an aim to discourage investors from going for direct mutual funds. You can easily invest through online platforms like Jama for a nominal fee.
You can also signup for an advisory service which will give you the best of both advice and transaction fulfilment. The cost for the advisory fees will be still be lower than what an investor pays via hidden commissions.
Conclusion :
Direct plans are cheaper than regular plans do not switch to the former as they are unaware of the direct plan which can increase their overall return. Account of cost savings, will get compounded over the years and help you to build a much bigger corpus in the long term for long term profits.
