Direct plans of mutual fund provide better returns

Updated: Monday, September 30, 2013, 17:11 [IST]

Since the beginning of the year, mutual fund houses had been directed to provide separate net asset values (NAVs) for existing mutual fund schemes for the direct plans and regular plans. So, why the directive was given and for whom? Direct plans as they are purchased directly from the fund houses and involve no intermediary entail very less administrative expenses compared to regular plans.

So, the directive is justified and this NAV is applicable only for investors who purchase directly from the fund house. A typical direct plan of mutual fund has DIRECT term affixed to it.

How direct plans of mutual fund yield better returns?

Direct plan of a mutual fund scheme that includes the same set of securities in the same proportion as a regular scheme but with low fund management cost have lower NAVs. For equity oriented funds, holding of funds in a direct plan is likely to be cheaper by 0.75% while in case of debt-oriented fund, cost would go down by 0.5%. This cost benefit though seems negligible results in better returns for the investors as fund administration and operating charges are recurring in nature.

Among the different category of mutual funds, investment through direct route have yielded higher returns in case of equity linked savings scheme, large cap-oriented equity funds, monthly income plans and long-term income funds.

Direct plans with higher yield would be more enticing for investors and situation can be worrisome for intermediaries and distributors who provide services to large institutional investors. However, the current scenario is not as worse as it seems for the intermediaries as still many investors do not have the requisite aptitude for fund management and are ready to part away with additional funds if provided with best of services in terms of appropriate fund selection, track fund performance and assist in redemption process.

However, if retail investors with adequate financial acumen like other institutional investors want to capitalize on higher returns available in direct plans of mutual funds they can do so by taking clue from the ranking for the different funds and make investments directly in top-notch funds.

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