Direct plans now 40% of MF assets

Push led by institutional investors, especially in debt products; however, experts divided on whether the savings here are worth it in the longer run for small investors

The percentage of direct plans sold by mutual funds has continued to surge and now forms nearly 40 per cent of sectoral assets.

While the percentage of direct plans in the debt category was always high, there has been an uptick in the equity segment as well. Direct plans were about 39 per cent of the total of assets under management (AUM) of the MF sector as of June 30, Value Research data show.  Equity plans were 12 per cent of overall equity AUM, up from 7.6 per cent at the end of March 2015. In the debt category, that number has inched up to 53 per cent, from 48 per cent earlier.

“There is a regulator push towards embracing direct plans and large AMCs have set up dedicated teams to reach out and service direct investors,” said Manoj Nagpal, chief executive, Outlook Asia Capital.   

Direct plans allow investors to bypass distributors and save on commission. These also have a higher net asset value (NAV) than the regular plan, as the former's expense ratio is lower. Investors can save roughly 75 basis points (bps) in direct equity plans vis-a-vis regular equity ones.

Thus far, the overall push towards direct plans has been led by institutional investors, especially in debt products. Sectoral estimates suggest about 60 per cent of institutional investors now invest in direct ones, compared with 10 per cent for individual investors.

However, the latter figure is likely to go up, with high net worth individuals routing their investment through registered investment advisers, than through distributors. “Several wealth management platforms are advising entrepreneurs and other rich investors to go direct while investing in MFs. These firms typically charge flat fees for their advisory services and hand-hold investors during the investment, in exchange for a fixed fee,” said the head of a large fund house, on condition of anonymity.

Investors can, as mentioned earlier, save roughly 75 bps in direct equity plans vis-a-vis regular equity ones, say experts. For debt categories, the savings can be five to 10 bps for liquid funds, 25-30 bps for short-term bond funds and 50-60 bps for long-term debt funds. The markets regulator, Securities and Exchange Board of India, has also been nudging fund houses to pass on the full commission benefit to investors.

However, some market participants also believe that going direct might not be the best option for retail (small) investors. “It’s difficult for these investors to analyse and take informed decisions on selecting the right fund, as well as do a proper asset allocation and decide on the investment time horizon,” said G Pradeepkumar, chief executive, Union KBC MF.  

“Going direct might help them save 75 basis points but in the long run, if good advice can get them three percentage points of extra returns, going through the distributor route is more than worth it.”

Experts believe it might be a good idea to go direct in specific categories, where the performance does not vary much across schemes, say experts. For instance, one can go direct in liquid funds and index funds. However, an advisor might be needed if picking a long-duration bond fund or investing in a mid-cap fund, since these require a deeper understanding of market dynamics. "You can go direct in a retirement plan, as the holding period will be 15-20 years and gains over regular plans can be significant," says Nagpal.