Direct Plan of Mutual Fund: Should you Invest in it or not?

There has been a huge buzz going around with the concept of “Direct Plan of Mutual Fund”. Several investors are still not aware of about the full effect of this scheme of mutual fund and whether they should be investing in this or not. Let us unravel the same in this particular article.

Direct Plan of Mutual Funds: What it Implies?

Just a few years back, SEBI had claimed that all of the AMC’s should be coming out with 2 options for every mutual scheme they possess. One should be the normal one. The second option would be the Direct Plan of Mutual Fund that would be available with a lower expense ratio in comparison to the standard option. It is due to the reason that when an investor would be investing in the direct plan of the mutual fund, then there is absence of involvement of any intermediary in between the transactions. Therefore, a great amount of associated cost gets eliminated. This is the reason why the direct plan of mutual fund comes with the lesser expense ratio.

Is Direction Plan of Mutual Fund Superior in Terms of Returns?

To understand the same, we will have to understand the difference between the expense ratios in both the standard plan and the direct plan of the mutual fund.

The expense ratio of any mutual fund tends to have a greater effect on the end returns over a long period of time. A small decrement in the expense ratio could result into an increase in the long-term returns of the investors by a significant margin. The direct plan of mutual funds will be having a substantial amount of difference when the aspect of the expense ratio is concerned. As far as the equity funds are concerned, the direct plan would have it somewhere between 0.40 percent to around 0.75 percent less value of expense ratio in comparison to the standard option.

Differences in NAV

The direct plans of mutual funds have come into effect from 1st January, 2013. This implies that on 1st January, 2013, NAV must have had remained the same for both the direct as well as standard plan of mutual fund. From there onwards, the NAV would have started to differ for both the plans. As the direct plan of mutual funds come with a lowered expense ratio, the NAV under the direct plan would also be lower along with the gap getting widened as well.

Who Should be Investing in the Direct Plan of Mutual Funds?

Several investors feel that the direct plan of mutual fund is perfect for all types of investors. However, this is not the same. Only the particular investors should advance towards making their investments into the direct plan of mutual funds that are:

  • Able to select the right mutual fund for themselves
  • Ready for reviewing their portfolios by themselves and without anyone else’s help
  • Able to point out the bad performing & returning mutual funds and thus, are capable of removing the same from the portfolio
  • Ready for investing with each of the AMCs individually

How to Invest in the Direct Plan of Mutual Funds?

The only thing that you need to keep in mind while applying for the direct plan of mutual funds is that you click the option “Direct Plan” while filling out the form of mutual funds investment. When you have tick marked the Direct Plan option, then all your funds would be of the category Direct Plan in Mutual Funds. One could fill up the respective form with any particular AMC in their office or one can also make use of the Karvy or CAMS for making the desired investment. You can also glance through, it gives a pretty clear idea about the basic portfolios for investments, which I found quite helpful, as a first-time investor.

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