MF Direct Investing – Demystified

While investing in a mutual fund, it is important to understand the differences between direct plan and regular plan. For instance, investment in a direct plan helps an investor in two ways to generate better results than regular plan. The article outlines the broad distinctions between the two and how to invest in direct plan.

Capital market regulator, the Securities and Exchange Board of India (SEBI), has recently issued a circular that specifies the asset allocation that needs to be followed for the multi-cap category of funds. This has been done to make it ‘true to the label’. Irrespective of the outcome, this shows the proactive nature of SEBI when it comes to protecting investors’ interest. Exactly eight years back, one more such initiative was taken by SEBI in the interest of investors. In September 2012, asset management companies (AMCs) were asked to launch a ‘direct plan’ of their schemes. This came into effect from the start of the year 2013. The idea was to allow investors buy mutual fund schemes without any intermediary.

For these direct plans everything remained the same besides the expense ratio – be it investment objective, investment strategy, portfolio, exit loads, etc. Therefore, the direct plan includes those schemes where investors can directly invest in funds without involving any agent or intermediary. This allows investors to invest directly into mutual funds schemes without Cover incurring the commission or brokerage cost that was earlier paid to distributors or banks. The funds which involved distributors or any intermediary become the ‘regular plan’.

Since funds with direct plan have lower expense ratio as compared to the regular plan, the net asset value (NAV) reported by the direct plan will be higher than the regular plan. This is because your NAV is the net of expense ratio, which means expense ratio is deducted directly from the fund’s NAV. Therefore, the lower expense ratio of the direct plan helps the fund to outperform the regular plans. This outperformance becomes bigger with time as the compounding effect kicks in.\

Direct Plan and Returns

Investment in a direct plan helps an investor in two ways to generate better results than regular plan. First, the entire fund is getting invested in your selected fund and hence assuming returns are positive, future returns will be better with the growth of additional money. Besides, the lower expense ratio of the fund will help you add on every year. Our analysis of almost 230 equity-dedicated funds has shown that the average difference in returns between the regular and direct plan of a mutual fund scheme on a cumulative basis since 2013 is around 5 per cent.

For example, a fund like Tata Retirement Savings Fund – Progressive Plan with regular plan has an expense ratio of 2.41 per cent whereas its direct plan has an expense ratio of 1.54 per cent. The difference between direct and regular plan in the last one-year return is 1.8 per cent. The cumulative difference is around 13 per cent since 2013. The graph below shows the relative movement of NAV between the regular and direct plan.

Similarly, in the case of Mirae Asset Great Consumer Fund the difference of expense ratio between direct and regular fund is 1.54 per cent and the difference in yearly returns is again 1.8 per cent while the cumulative return difference is 10 per cent. Despite such return differentials retail investors seems to be reluctant to adopt a direct plan. At the end of August 2020, individual assets were primarily driven by distributors where a commission is involved and formed 81 per cent of the assets of individual investors. Out of this, T 30 cities (T 30 refers to the top 30 geographical locations in India and B 30 refers to the locations beyond the top 30) brought in by distributors is 59 per cent while B 30 account for 22 per cent.

Direct investments amount to 19 per cent of individual assets divided as 3 per cent from B 30 and 16 per cent from T 30 at the end of August 2020. One of the reasons retail investors are yet to adopt the direct plan of a fund is their lack of confidence in selecting and investing in a fund. They still need persuasion and advice from agents to invest. Besides, what is also hindering their acceptance of the direct plan is lack of understanding on how to invest in a direct plan.

Investing in Direct Plan

There are different ways in which you can invest in the direct plan of a scheme. The process that you adopt will depend upon your confidence and comfort.

Asset Management Companies : Investment through asset management companies (AMCs) is one of the best and easiest ways to invest in a direct plan. You can invest both offline and online. But before any investment you need to be KYC-compliant. To check if you are a KYC-compliant or not you can check the websites of various KYC registration agencies such as www.cvlkra.com, www.kra.ndml.in, www.nsekra.com, www. camskra.com or www.karvykra.com by entering your PAN number. If you are not KYC-compliant you cannot invest and must first fulfil the requirement.

Online investment is very easy and just needs a few clicks to park you funds in a fund of your choice. Many AMCs do not even require you to register. There you can just enter your PAN number and other details such as email address and phone number and you are ready to invest. Below is a screenshot of the SBI Mutual Fund. On the left side of the illustration you can see that you do not even require creating a login. Nevertheless, if you want to repeat the investment, it is better to create a login so that you are not required to fill in the same details again and again. Different fund houses have different requirements; however, most of them will require only a few details before you can start investing in the direct plan of a fund.

Once you have entered the required details, it will take you to the investment page where you have the option to select the funds you are interested in to invest. While entering details you should choose direct plan instead of regular plan. In case you select regular plan it may prompt you to enter ARN (AMFI registration number). Once you are prompted to enter an ARN number you should go back and select direct plan and proceed .

The above two illustrations show how to select a direct plan while you are investing in a mutual fund. In case you are not comfortable investing online, you can invest in direct plan of a fund offline. You just need to visit the branch of a fund house or their website and download the required form, fill it and select the direct plan’ option along with other details and submit it to the branch office. The investment application form carries a space to write the distributor or broker code. It is important to write direct in that space while filling up the form. The rest of the form is identical to the regular plan. The illustration below will help you to understand it better.

Investment through Registrar and Transfer Agent (RTA)

Registrar and transfer agents (RTAs) such as Computer Age Management Services (CAMS) and Karvy Corporate provide backend services to mutual fund companies. RTAs help in connecting investors, mutual fund companies and other intermediaries. RTAs maintain a detailed record of investors’ transactions on behalf of mutual fund houses. These RTAs offer mutual fund investment services across diverse AMCs through their websites and mobile apps. Again you do have an option of investing offline and online through RTAs.

For offline investment you can visit their branch office and fill the required form and initiate the investment process. In case of online investment you need to create a login with RTAs and after that you can invest in the direct plan of any fund through them. Once you have logged into the RTA website, it will ask you the fund house name, mode of payment and scheme name. You need to select the direct plan option and only then proceed. The below screenshot is taken from CAMS, which shows how you can select the direct plan options.

The benefit of investing through RTAs is that you can pick and choose schemes across fund houses instead of visiting individual websites of mutual funds. The investment will be limited to the mutual funds registered with them. For example, through CAMS you can invest in funds of up to 16 AMCs. You need to have just one login id for this site to invest across the funds with different fund houses.

Mutual Fund Utilities : Mutual fund utilities (MFUs) is a shared service platform promoted by different mutual fund houses (39 fund houses are part of this initiative) to help investors and provide them with a channel through which they can easily invest in various schemes of the participating AMCs and keep a track on their holdings and transactions at one place. To invest in direct mutual funds through the MFU platform, you will first need to create a CAN (Common Account Number). CAN is a unique reference number issued by MFU. You can create e-CAN online.

Getting KYC-Compliant
To start investing in mutual funds you need to be a KYC (know your customer)-compliant. This is to comply with the market regulator SEBI in accordance with the Prevention of Money Laundering Act, 2002 (PMLA). This is a one-time process and you can get your KYC done through a SEBI-registered intermediary, mutual fund house, distributor or any online platforms such as KRAs (KYC registration agencies). It involves verifying your identity as a mutual fund investor. It can be done online as well as offline. In case of offline, you need to download the KYC form, fill the details and submit it to the branch of a fund house or RTA (registrar and transfer agent) office along with your photo, identity proof and address proof. Once you submitted the required documents it may take some time to process it, following which you will be ready for investment. In case of online or e-KYC, you can complete the entire process without visiting any office. What is required is a good internet connection. You will need the same set of documents that you need to scan and upload and complete in-verification through video call. You will need to digitally sign the documents

It can also be created offline by submitting the required form along with documents to any of the nearest point of service (POS) of MF Utilities India or a participating AMC branch. The CAN will map all your existing mutual fund folios across fund houses participating in MFU, thereby providing you with a consolidated view of all your mutual fund investments. Once you have created your CAN, you can sign up for online access through their portal, www.mfuonline.com. You will need to create a user ID and set up a password for the account. Once logged in, you can start whatever transaction that you want such as purchase, redeem, switch, SIP, SWP and STP. If you are investing in regular plans and wish to switch to direct plans, you can use the switch option.

Robotic Advisory Platforms : Beyond what has been discussed above there are many robotic or automated advisors and financial technology companies that help investors to invest in the direct plan of a fund through their websites. They are mutual fund aggregators and help you in conducting all the mutual fund transactions through their sites. Robotic advisory platforms provide you automated, algorithm-based financial planning services. They will ask you some basic questions about your financial goal, collect information such as your income, saving, age and others to offer you a portfolio that will help you to achieve the financial goals.

Before sharing any information online and trying any of these robotic advisory services, it is of utmost important to check the authenticity of the site and services provided by them. These firms’ charges are very cost-effective but cost is only one part of your entire financial planning and hence it is important to first check their background and services offered. Our advice is to conduct thorough research before investing through these automated platforms.

Registered Investment Advisor : A registered investment advisor (RIA) helps you in your financial planning and provides you advice on buying or selling mutual funds for a fee. One of the things that make RIAs different from other intermediaries such as brokers, agents, banks, etc. is they are bound by fiduciary duty as is the case with lawyers and doctors who will always put the interests of their clients above their own interests. Any recommendation is solely based on suitability of the product to a client’s specific needs. RIAs charge customers and do not earn commissions from fund houses for suggesting schemes. On the other hand, mutual fund distributors or agents earn commission income and do not charge fees for scheme purchases.

SEBI has put strict certain minimum qualifications for RIAs, as for example, he or she should be a post-graduate in any finance discipline or a certified financial planner and have five years’ work experience in investment management and financial advisory services. So if you have availed the services of a fee-based investment advisor, he or she may make a transaction on your behalf in the direct plan of a fund.

If you are already invested in a regular plan and wish to move the existing investments into a direct plan, you need to give a switch request. This will be mostly applicable if you are investing through a fund house website such as MFU or RTA. This entails redemption from the regular plan and investment into the direct plan. Exit load and capital gain tax, as applicable, may have to be paid with respect to such redemption.

Direct Plan Suitability

Investing in the direct plan of a fund may help you to save cost; however, if you are not taking the help of any RIA, you should be smart enough to understand the product thoroughly while being able to take rational investment decisions without the influence of any bias. You should also have appropriate time to invest and finally you must be aware of the financial goals for which you are investing. These are not tough qualities to possess. However, when you are dealing with your finances it is always better to be safe than sorry and hence it is advisable to take the help of an expert who can help you through your investment journey.

Benefits of Investing in Direct Plan

✓ Returns: The returns in case of direct mutual funds are always higher than their regular counterparts. The difference increases with increase in time. Hence, the return difference will be higher in five years compared to three years.

✓ Low Expense Ratio: Since you are investing directly into a fund without taking the help of any intermediary, your fund has a lower expense ratio that helps you to earn more.

✓ Conflict of Interest: While investing through an intermediary there is always a chance of conflict of interest. The agent may promote the fund that is offering him better commission; however, the fund may or may not be suitable for you.

✓ Control of Investments: Investment in direct funds mostly means you are investing directly and you know everything about the fund, fund house and the process involved in investing. By any chance if you change your location you still know everything about your investment and are in control of your investment.