Why Direct Mutual Funds Scheme Reap Better Returns than Normal

Ever thought what is the best vehicle to secure your payments against the market shocks? Yes! You guessed it right-Mutual Funds. One of the primary reasons why people shun traditional forms of investment and go for them is because these financial instruments can help them to battle the inflation.

Mutual Funds that go beyond brick and mortar method of investment

After facing a lot of flak for the additional expenses that mutual funds industry charge for the regular plans, SEBI introduced a bold move for the investors who understand the nitty-gritty of the investments. This plan was named as a direct plan.  Though the concept remains the same  there is a little tweak involved in it. Under such a plan, the customer approaches the fund house or AMC directly without any middle man. Since there is no middle man involved, the distributor commission is reduced. This means low expense ratio and hence better compounded returns. Since everything else remains the same like regular plans, direct plans yield better returns than regular plans.

Since direct plans have 50 and 1000 bps less of expense fees, these tend to be a more investible item.

Here’s a chart validating the same:

This clearly reveals that direct plans are better than regular ones.

Here is a sneak peek on some of the best performing plans

The SEBI has been constantly pushing the availability of such plans for the investors for several years. According to the data, by January end 65 percent of institutional and HNI investors have opted for the direct plans.

 “Usually, HNIs and institutions opt for direct plans. There are very less retail participants who are aware of these direct plans,” said Rajesh Krishnamoorthy, Managing Director, iFast Financial India, a platform provider for independent advisers and MF distributors. He further quoted that these plans are still to pick up a momentum because the investors are unaware about the same.

Conclusion

But there is a catch t it. Direct mutual fund schemes are best suited for do-it-yourself investors who can research about the mutual fund schemes on their own and then save cost. If you need any help in finding the best mutual fund scheme, it is better to go for a regular plan. Distributors charge extra commission on purchase you make from them. Alternatively, you can take the help of a financial planner or SEBI registered investment advisors. A lot of people select mutual funds on their own and if you fall under the similar category, switching to direct plans can be a great asset. But before that, do consider taxes levied on it i.e. capital gain tax, exit load and lock-in restrictions.