Mutual fund Direct plans vs Regular plans – Which is the better option?
From Jan-2013, as per direction from SEBI, mutual fund houses have started tracking the mutual fund schemes under direct plans separately. Mutual fund direct plans are those where mutual fund schemes would not charge distributor expenses / trial fees and hence the NAV of such direct plan would be higher compared to regular plan. However the investment mix in the mutual fund scheme would be same for direct or regular plans. Earlier mutual fund houses have already issued mutual fund direct route, however whether it is thru distributor or thru direct route, it was tracked with single NAV, hence an investor was bound to buy mutual funds based on the NAV.
Features of Mutual fund direct plans
- Individual investors can directly invest in direct plans without involving distributors or brokers.
- There would not be any distribution / trial fees paid to distributors or brokers for such mutual fund direct plans. Hence the annualized expense ratio would be lower and investors would get higher returns compared to regular plans. The equity mutual fund direct plans scheme expense ratio would get gained between 0.50% to 0.75% p.a. and debt mutual funds between 0.20% to 0.50% p.a. depending upon the mutual fund house expense ratio.
- There would be a separate NAV (Net asset value) for direct plans. The scheme would denote “Direct” in its description for such direct plans.
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How to switch from existing mutual fund regular plans to Mutual fund direct plans?
Direct route: If you have earlier invested your mutual funds through direct route, these mutual fund plans are already been shifted to mutual fund direct plans. Hence an investor need not worry about this. In case the switch has not happened for any reason, an investor can contact mutual fund house.
Regular mutual funds: If the investor wants to switch from regular mutual funds to direct plans in mutual funds:
Lump sum investments: If an investor made lump sum investments, then he/she can submit switch form to mutual fund house. These mutual fund units would be shifted from regular mutual fund schemes to direct plan of mutual fund schemes.
SIP: If you are investing through SIP, then an investor can submit switch form, where the existing SIP units would get shifted from regular plan to direct plans. All future SIP transactions also would get automatically shifted to direct plans.
However both these options would attract, STT, capital gains tax and exit load depending upon the period of investment.
Agent will not submit your application for direct plans as he would not get distributor or trial fees.
Are there any additional costs involved during or after switching to direct plans?
Switching from regular mutual fund plans to direct plans of mutual fund would cost you.
Direct mode to direct plan – No costs: If the shift is from mutual funds direct mode (earlier who invested directly) to mutual funds direct plan, there is no exit load.
Exit load if redeemed before 1 year from original date of investment: If the shift is from regular plan to direct plan and if you withdraw the mutual fund investments before 1 year from original date of investment, necessary exit load would be applicable. E.g. if an investor had invested in regular plan during Apr-2012 and shifted to direct plan from Jan-2013. However, redeems during Feb-2013 (11 months from original date), it would attract exit load. MF industry feels that this exit load would protect the interest of distributors.
Capital gains tax: Necessary capital gains tax would be applicable for such switch from regular plan to direct plans. This switch would be treated as two separate transactions and necessary capital gains tax would be applicable.
Also read: Top-10 Diversified mutual funds
Who should invest in such mutual fund direct plans?
- Direct plans in mutual funds is good for investors who wish to invest in mutual fund schemes by directly dealing with mutual fund houses without distributors.
- Investors who want to increase their returns by way of reducing expense ratio.
- Investors, who are tech savvy and have moderate financial knowledge in selecting good mutual fund schemes, can opt for such plans.
Drawbacks about mutual fund direct plans
Though mutual fund distributors or brokers would be against such direct plans as it would reduce their business, there are some minus points to be considered apart from this.
- Investors should invest directly without distributor getting involved.
- Investor should have moderate knowledge on how mutual fund schemes would run so that he can directly deal with them.
- Investor should take care of documentation process. It includes getting acquainted with various regulations from time to time, submission of mutual fund applications, tracking, portfolio consolidation, nominee inclusion or modification, change of address, KYC compliance issues etc.,
- Investors should do their own analysis and select top performing mutual fund schemes. Investor need to depend upon mutual fund websites or blogs to get to know about good mutual fund schemes.
How to handle mutual fund direct plans in better way?
Here are some suggestions on how to handle direct plans in mutual fund in better way.
Lump sum investments: If your investments have not matured 1 year, wait for one year to get capital gain tax exemption or reduce your capital gain tax and exit load and then switch to direct plans.
SIP: Stop existing SIP schemes in regular plans and start new SIP schemes in direct plans. Once your existing SIP regular plan mutual fund units come to a stage where it would not attract capital gain tax or exit load, you can switch those units to direct plan.
Conclusion remarks: Introduction of mutual fund direct plans is a good move. You can maximize your annualized returns by investing in these direct plans. If you have moderate knowledge about mutual funds and if you can invest some time for documentation purpose, it is worth investing through direct plans.
Readers, I would like to invite your views and comments on this article.
If you enjoyed this article, share this with your friends and colleagues through Facebook and twitter.
Suresh
Mutual fund Direct plans vs Regular plans – Which is better option
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What is difference between ICICIdirect and ICICIpruamc? both are offering mutual funds online… is it that ICICIdirect is sort of agent and therefore investments made through that are regular plans and ICICIpruamc is direct investment?
ICICI AMC is the fund house which offers mutual fund schemes. ICICIdirect is only mutual fund agent. Like ICICI there are fundsindia, fundsupermart, scripbox which acts as agents in selling the funds from various AMC houses
Very good article. Axis Direct is giving option to buy MFs without any charge. In this scenario, is it always better to buy “Direct” plans,by looking at regular plans?
Ghana Syam
Syam, It is surprising for me to note that they are offering direct plans. If any one is offering such direct plans in mutual funds, it is good invest through that method as all your investments are in one place and you can easily track it.
my portfolio holding 4 regular growth funds,my icici bank charge Rs.33/sip .if i select direct plan , my monthly sip transaction charges is stop or not ? why crisil not rank to direct growth plan mutual fund?
1) Whatever SIP value is, ICICI direct charges Rs 33 per SIP transaction 2) Direct plans are those where you directly approach mutual fund house and do KYC and invest in them. These are named with same fund name, but at end you would see “Direct”. Returns would be higher for such direct funds as they do not pay trial fees to brokers (in your case ICICI direct). Crisil does not rank direct plans as they are already ranking regular plans
Thank you sir. From which site I will download the form changing from regular to direct
Rupesh, You cannot convert. You should close existing SIP plans. Visit MF website (e.g.icicipruamc.com) and visit invest in MF option.
This pertains to HDFC Prudence Fund – Direct & Regular Plan (Equity). The Direct & Regular Fund is handled by same Fund Manager, has same underline (quality), except AMU differ due to inception under Regular is Feb 1, 1994 and under Direct is Jan 1, 2013. Prudence Fund on Feb 27, 2013 declared dividend per unit of 3% for both plans. However, on Feb 26, 2014 declared dividend per unit of 3% under Regular Plan and 1.25% under Direct Plan. Thus a very big impact in returns. The query is why such big difference in returns? Does it imply that one should switch to Regular and make future investments in Regular plan? Please reply & guide. Thanks. Shah (shahdyes@yahoo.com)
Hi Suresh
I have checked it from ICICIDirect.as I understand I have to pay 1.5% or Rs 30/(whichever is lower) per transaction as transaction fees for SIP.
1.Is there any tax applicable on purchasing of mutul fund units other than transaction fees(like service tax or charge)??.
2. is there any transaction charge for redemption of MF units ??(excluding the exit load)
3. Do I have to pay transaction charge separely for each mutul fund scheme or cumulatively?
Like- If i start 3 SIPs of 1000/ each.Do I have to pay 15/ (1.5% of 1000) for each scheme i.e total 45/ or I have to pay 30/ (as 30/ is lower than 1.5% of 3000)??
4.What you have said 33/ per 1000/ SIP,if at all I have understood it correctly,probably is the net saving over Old entry load(which was 2.5% of SIP) or including both transaction & service charge.
source of info http://content.icicidirect.com/mailimages/SEBI_LP.htm
Priyajit 1) No. I am doing regular SIP’s thru ICICIdirect, my SIP amount of RS 5,000 I need to pay Rs 5,033 (incl taxes). 2) I think similar charges would be there when you redeem 3) I thnk I answered this in point no.1
Thank u once again…
Hi Suresh
I consulted with the relationship manager…what she says
1.Transaction charge(tc): 1.5% or Rs 30 whichever is lower per transaction of a single scheme plus service tax of 12.36% of transaction charge.ex ; 1000/ SIP for a perticular scheme:tc 15/ + 1.68/(i.e 12.36% of Rs15)=16.68/
2.TC: for SIP 2000 or more for a particular scheme is rs 30/ + 3.2(12.36% of 30)=33
3. TC : 3 SIPs 1000/ each will have to pay 16.68/ per scheme..i.e total (16.68 * 3)=50
Plz confirm
Priyajit, I am not able to advice as there are transaction specific charges which ICICIdirect might be charging. I have seen Rs 33 as charges for Rs 5,000 SIP investment.
Hi Suresh
I am a new investor.I am interested in investing in UTI -OPPORTUNITIES DIRECT plan in SIP mode 1000/ p.m.I have a demat account with ICICIdirect.Now I am confused to invest through Icicidirect or directly with UTI.I learned I have to pay 150/ as entry load if I purchase through ICICIdirect.Is this one-time???Is there any other distribution charge if i purchase through Icici direct??
Hi Priyajit, If you go thru SIP, you need to pay Rs 33 per SIP amount in ICICIDirect.com. If you go directly to UTI fund house, you need not pay anything. On top of that you can get highest returns compared to regular plan. However you need to comply with KYC norms etc. If you are ready take that pain, you can go for direct plan, else you can go thru ICICIDirect. But the amount is not Rs 150, it should be Rs 33 only. Pls check.
Dear Suresh
I have been investing in MFs from past 3 years through HDFC bank ISA platform.Now I am planning to invest future SIPs through direct plans and I am already in the process of obtaining online access to the respective AMC's.
Now I want to close the exisiting ISA(investment services account) with HDFC .I understand that to close the account, either all MF units have to be redeemed or transferred to offline mode.Since I do not want to redeem the units I will go for transferring the units.I am already discontinuing the existing SIPs and start new SIPs in direct plans.
In above scenarion I seek your guidance on following questions.
1.What do you mean by offline units.Will I able to see/transact these units from the respective online platform of AMC's.
2.Is it necessary to convert all these units to DIRECT mode?If I do not wish to attract capital gains tax and exit load for units purchased ,what should I do? Does HDFC still remain the broker for the earlier units?
3.What is the correct procedure for closing any existing account with the broker & shifting the units to the respective AMCs directly with least or no cost invloved.
Thankyou
Abhijit
Abhijit, Some of the points are already covered in the article. Below are my comments. 1) Units purchased through direct plans are termed as offline units. If you are switching over from regular plans to direct plans, even these are termed as offline units. You should be able to transact all those transactions with mutual fund houses directly 2) You need not convert the units do direct mode. You can retain the same as is and start new SIP units in direct plans. However your existing units needs to be there with your current broker only to do that 3) If you want to close the account, you need to redeem the units or swtich over to direct plans. But when you do that, it is assumed that your existing units are redeemed and necessary short term capital gain tax or exit load would be applicable
Suresh ,
Good and detailed post .
I also want to close HDFC ISA account without redeeming all units . I did obtained online transaction access with respective AMC (in my case 4 fund house , including HDFC Mutual fund ).
Now I am not sure of all the steps but I think you don't have to redeem already purchased units ( refering to point 3). Please elaborate on necessity of this step , I mean HDFC Bank was just a broker in purchasing of units . Trusting info presented in http://www.jagoinvestor.com/forum/information-on-how-to-close-of-hdfc-bank-isa-account/824/ .
I am yet to speak to any HDFC bank person for confirmation of above steps (planning to call or visit bank branch next week). Thanks
Vinay, You need not redeem existing units. However your existing plans which you purchased through broker would continue to earn lower returns compared to direct plans.
You are correct Suresh . Thanks for clarifying the doubts.
May not be related to original post but here is additional information about transferring to offline mode ( Thanks to a very helpful RM at HDFC Bank branch's mutual fund desk ).
………………………….
A request letter from the customer for transfer of holdings from Online to Offline mode. (In the specified format)
Following details should be mentioned in the request letter:
* Folio nos and scheme names mentioned.
* New broker code ARN 0005; existing broker code HDFCPB …. should be mentioned.
* Physical application form filled and signed by the investor for the schemes that he has invested in.
* Cancelled cheque is mandatory.
The following details are to be provided by the customer to his existing RM or the nearest branch (along with PAN card copy). Based on receipt of the request, HDFC bank will process & provide the details to the AMC.
Subsequent to processing by the AMC, the holdings will be transferred from the online mode to the offline mode and customer will be able to close his ISA Account.
……………………………….
Hi Suresh,
How do I invest in direct mutual funds /mutual funds ? I mean should i contact an agent and buy these or buy it online ? I see a lot of articles like invest in mutual funds. But how do i start with ? Do you have any suggestions ? I also would like to know to any articles to read about the different mutual funds and classificaitons and advantages between them. Do you have any written by you ?
Thanks,
Daniel, If you want to go thru Direct plans, you need to contact the mutual fund company directly. You can do this thru online also by visting the mutual fund scheme website. I have not listed them in single article, will do that in next 1-2 weeks.
sir, i want to get some details of fmp by latest icici preduntial whose closing date is 16th of may.plz give us your analysis work on this scheme.i m new in field of mutual fund.plz reply sir
Hi Raj, If you observe I do not cover new fund offers like what you said FMP of ICICI. The reason is new funds cannot be judged on how they would perform in future. I am not saying returns would be the only criteria to check whether a fund is doing good or not, but it would indicate how it behaved under various investment cycles. Hence my personal opinion is stay away from new fund offers. FMP’s are fixed maturity plans which matures in 1 to 3 years time frame and may provide moderate returns.
Dear Suresh,
Thanks a lot for the info about Direct plans along with benefits and drawbacks. This timely published article helped me a lot. I am planning to invest MF SIPs from FundsIndia.com. Please share me the benefits and drawbacks on this.
Thanks
Ravi N
Hi Ravi, Thanks for reviewing our articles and providing feedback on them. Fundsindia.com is like any other mutual fund broker with some positives. It has several positive features like zero transaction charges, good mutual fund analysis etc., I have not personally opened the account, hence I do not know the customer service. But when I have analysed fundsindia.com and posted an article, several investors gave positive feedback. As of now, no one has given any feedback about the drawbacks to me, hence not able to comment.