Direct plans trump regular mutual fund schemes in returns

However, only 10% of retail investors opt for direct plans owing mainly to financial illiteracy

Direct plans of mutual fund schemes have made better gains for investors than their regular schemes have offered.

When an investor approaches a fund house directly at any branch, without an intermediary, this is categorised as direct investment. If made through a distributor-cum-advisor, such investments come under the regular mode.

In the past three years, direct schemes have given about 100 basis points (bps) of additional annual compounded return (a basis point is a hundredth of a percentage point).

Since direct plans have between 50 and 100 bps less of expense fees (in the case of equity schemes) and there is no component of distributor commission, these tend to offer relatively more return to investors, on the back of a higher investible sum.

The varying returns are quite visible. For instance, top schemes like HDFC Equity Fund, HDFC Top 200, Franklin India Prima and ICICI Prudential Focused Bluechip Fund offered annual compounded return of 16.7 per cent, 14.7 per cent, 29.9 per cent and 16.7 per cent, respectively, for regular schemes in the past three years. Had the investors come directly, the returns would have been 17.6 per cent, 15.5 per cent, 31.4 per cent and 17.8 per cent, respectively.

The Securities and Exchange Board of India has been pushing for availability of direct plans to investors for several years. In the past three years, the MF sector has obliged by launching direct plans of existing schemes. Even so, these are yet to pick up momentum among investors in a widespread manner.

The primary reason is lack of financial literacy among potential investors, particularly non-wealthy individuals. Overall, 38 per cent of the sector's assets have come directly. A deeper look shows it is mainly the large and well-informed ones, such as institutions and companies, which have opted for going direct. For instance, institutions put nearly 75 per cent of their assets in MFs through the direct mode; for companies, it is about 60 per cent.

Individuals, both the high net worth ones (HNIs) and others, over 90 per cent of the MF sector's investor base, have largely remained away from going direct. Data from the Association of Mutual Funds in India shows about 16 per cent of HNIs' assets were invested directly. For non-wealthy or 'retail' individuals, it is about 10 per cent.

This signifies that smaller investors continue to need hand-holding and advice, with only learned investors opting for direct schemes. Fund officials says independent financial advisors are the much-needed foot soldiers if they're to penetrate more as investment products.

However, recent actions from the market regulator — capping of upfront commissions, tightening of the trail model or strong views on cutting of expense ratios — appear to be going the other way. Sector officials and financial advisors feel India is not ready for such moves.

3-year returns offered by schemes in direct & regular mode
Schemes	Returns (%) in CAGR
	Regular Plan	Direct Plan
HDFC Equity	16.73	17.61
HDFC Top 200	14.75	15.45
Reliance Equity Opportunities	18.58	19.45
ICICI Pru Dynamic Fund	17.81	18.71
Reliance Growth Fund	20.86	21.71
IDFC Premier Equity	23.45	24.32
Franklin India Prima	29.94	31.4
UTI Opportunities Fund	13.58	14.43
HDFC Mid Cap Opportunites	28.97	29.96
BSL Frontline Equity	18.8	19.89
Kotak 50	16.54	17.61
Franklin India Bluechip	16.11	17.09
BSL Top 100	19.93	20.99
As on June 6, 2016
Source : Value Research Online