Direct plans for equity schemes seeing steady rise since last 5 years

The share of such plans among equity schemes has risen around 7 percentage points from 9.6 per cent to 16.6 per cent in the past five years

Nearly a sixth of equity assets under management (AUM) is now contributed by direct plans, which require investors to invest without the aid of distributors.

The share of such plans among equity schemes has risen around 7 percentage points from 9.6 per cent to 16.6 per cent over the past five years, latest data from Value Research for the quarter ended March 31 (Q4FY21) shows. A year ago, this figure stood at 15.5 per cent.

The percentage of direct investments in equity schemes may inch up further, with wealthy investors increasingly routing their money through registered investment advisers and wealth management firms. The move towards digitisation in the aftermath of the pandemic may also spur the move towards going direct, said experts.

“Direct plans have got a fillip in the last few years as more and more RIAs (registered investment advisers) have become active. These advisers charge a fee for their advice from clients instead of taking commission from manufacturers and ask clients to go direct. The growth of fintech platforms such as Paytm Money, Zerodha Coin, and Groww that offer direct plans on their platform and which also operate as RIAs is another contributing factor,” said Pradeepkumar G, chief executive officer, Union MF.

Some of these platforms may cross-sell other financial products such as digital loans and gold, and may push plans of particular fund houses that they have a tie-up with.

The overall share of direct plans across all schemes, including debt and hybrid, stood at 39.2 per cent at the end of March, a slight dip from 39.6 per cent last year. The figure was 36.7 per cent five years ago.

The bulk of the money in debt assets is from institutional investors.

Direct plans allow investors to bypass distributors and save on commission. These have a higher net asset value than regular plans, and the expense ratio is also less. Investors can save 80-100 basis points in direct equity plans vis-a-vis the regular equity ones.

Experts cautioned that direct plans are meant for evolved investors and they need to ensure they do not distort their asset allocation or pick the wrong scheme to save 50-100 bps. An MF is not a low-involvement product like a fixed deposit and investors need to track performance over various tenures, understand the fund management style, look at expenses and the risks involved before selecting a scheme, they said.

The Securities and Exchange Board of India had, in the past, expressed concerns over the muted response to these plans. It had also highlighted a few times that the difference between regular and direct plans was not equivalent to the distribution commission in some schemes. 

In 2018, Sebi came up with guidelines for greater transparency in the way expenses are calculated, prompting fund houses to both cut and raise expenses for their direct plans.