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Long Term Returns for Going "Direct" Can Give You Many Lakhs More


Last week, we wrote about how investing in Direct Plans vs Regular Plans could give an investor up to 0.7% extra returns annually. The differential is because of commissions that the distribtors get versus none in the Direct route.

Take the HDFC Equity Mutual Fund, for instance. The Fund was started on January 01, 1995 with a starting NAV was Rs. 10. The Direct Plan was introduced in January 2013.

This is how the NAVs of both the Plans of the Fund have grown since Jan 01, 2013:

NAVs - Reg vs Direct

On January 01, 2013, the NAV of the Regular Plan (the only one existing at that time) was Rs. 296.88. The Direct Plan was then introduced. Now, if investors chose to, they could enter into either Direct or Regular Plans at the same price. As of March 05 this year, the NAV of the Direct Plan (Rs. 494.84) is Rs. 7.45 above that of the Regular Plan (Rs. 487.39).

The regular plan has a higher Expense Ratio. (2.18% for the Regular, and 1.50% for the Direct Plan).

Direct Plans Can Make 10% Greater Returns Over The Longer-Term

If we invested Rs. 1,00,000 in the same fund right now, then how would the Direct plan fare versus the Regular plan? For simplicity, instead of the CAGR of 21.23% (which is quite high), let us assume a return of 12% for the Regular plan investors, and 12.7% for those who went Direct.

NAVs - Reg vs Direct-02

Rs. 1 lakh invested in the Regular Plan gives you Rs. 9.64 lakh after 20 years.

The same investment yields Rs. 10.93 lakh if invested in the Direct Plan; 13.3% higher!

This calculation was only for a one-time investment. With a Systematic Investment Plan (SIP) of Rs. 5,000 each month, at the end of 20 years, you would have Rs. 49.96 lakh in a Regular Plan and Rs. 54.96 lakh in the Direct Plan. That is also 10% extra!

More importantly, it’s Rs. 500,000 extra – and who doesn’t want an extra Rs. 500,000?

How Can We Invest Directly?

Investing Directly is simply about buying from the Fund directly. Either on the Mutual Fund’s web site, or by giving them paper forms. Remember, buying on HDFC Bank’s Web Site doesn’t mean you buy Direct from HDFC Mutual Fund – you have to buy it from HDFC Mutual Fund’s web site directly. If you buy from intermediaries like Funds India, Scripbox or Aditya Birla MyUniverse, you’re not buying Direct.

The most common way is to transact online: Most mutual funds now allow you to create a folio online with your information.

Sometimes the easiest way is to have a small transaction through a distributor, which then creates a “folio” with the mutual fund. Then, you can use this Folio to make further transactions on the mutual fund website, duly authenticated.

Regardless of the method of choice, enjoying those extra returns will be made possible only by the due diligence of the customer. There have been many instances where different funds have made opposing returns despite following similar strategies. The risk levels for schemes can also vary. HDFC Equity Fund for instance, currently has 97.95% of their assets invested in equities, the riskiest of asset classes. Differentiating among the various Fund Schemes based on their risk-reward ratios, their investment strategy (growth/value stocks, large/mid/small cap stocks) etc., is a job that erstwhile was left to distributors.

However most online websites now make it easy for an investor to sift through all that data and easily find the best mutual funds to invest in. Most intermediaries do no real work beyond the first year, but they earn commissions out of your investments forever. At a tiny percentage, this would be okay (say 0.1%). But when you see that you lose by 0.7% a year, you wonder if it’s worth all the lack of advice, which you could pay for like you pay a doctor.

What investors don’t really know is that you can get a far better return going Direct. Distributors don’t want to tell you. Advisors should (since they charge for the advice) but they want that back-end commission to spruce up their books, so they usually don’t either. Fund houses would like to, but don’t want to tick off their distributors by advertising that as the best option.

It’s going to be left to investors to find it. In an increasingly savvy India, it will not be long before Direct plans take over as investors’ default choice of investing. Take the 0.7%.


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