Regular and Direct Mutual Fund Products
The Mutual Fund AMCs design regular products factoring two components; i.e. the management expenses and the commission. When the investors buy Regular MFs; the embedded Commission in it is passed on to the Distributors and Banks. It is like selling branded medicines.
But now SEBI has directed AMCs to design Direct MF schemes without the commission in it. It is like generic medicines. These are transparent and the investors do not pay for the Commission component. These are not offered by the Distributors and Banks but by the SEBI Registered Investment Advisers (RIA).There is an element of quality in generic medicines. In case of Direct Mutual Funds, this is taken care of by RIAs who provide right financial advice and act in clients’ interest. RIAs are like Financial Doctors and are different from Distributors and Banks. RIAs focus more on advice where as Distributors including Banks focus more on products.
Benefit of Direct Schemes
SEBI has mandated that expenses ratios of MF schemes should not exceed 2.25% in case of equity schemes and 2% in case of Debt schemes. However, SEBI has permitted increased expenses of 0.30% in case of smaller cities. These include the commission paid to the Distributors and the Banks. The actual expenses of Regular and Direct MFs can be ascertained by searching in the internet .The difference in expenses is the commission of Regular plans.This is adjusted through NAV which is higher for Direct Plans and lower for Regular plans since commission reduces NAV of Regular plans. We provide the comparative expenses ratio of some Regular and Direct Mutual Fund schemes below .The differences are due to the commission embedded in Regular schemes. As may be observed, it is around 1% more in case of Regular schemes than in direct schemes .This excess of expenses in Regular schemes are paid to the Distributors and Banks as commission.
|Sl no||Funds categories||Schemes Name||Expenses Ratios (%)|
|1||Large Cap||Axis Blue chip||2.52||0.92||1.60|
|2||Mid Cap||BNP Paribas Mid cap||2.18||0.85||1.33|
|3||Small Cap||Reliance Small Cap||2.31||1.22||1.09|
|4||Multi Cap||SBI Focused Equity||2.47||1.47||1.00|
|5||Aggressive Hybrid||ICICI Pru Equity & Debt||2.05||1.05||1.00|
|6||Conservative Hybrid||ABSL Regular savings||1.81||0.96||0.85|
|Source: Value Research|
If one buys Direct Mutual Fund schemes, one can benefit by at least 1% pa by saving on commission. There are other benefits also by taking the advice from a SEBI Registered Investment Advisers (RIA).But they will charge a fee for the advice but bring the following positives for the investors; What should be the right way for investors?
- Transparency: One can clearly know how much one pay for the product and how much for the advice.
- Cheaper products: SEBI RIAs encourage Direct MFs with nil commission.
- Risk profiling: Risk profiling helps in determining asset allocation which is key for long term wealth creation
- Regular review:A professional investment adviser will conduct regular review of the portfolio..
- Rebalancing: Asset allocation is monitored through regular Portfolio rebalancing.
- Win- win: The commission saved in case of direct plans (around 1%) can be utilized to pay the fee to the adviser and hence no extra cost for the investor.
How to buy Direct Mutual Funds?
Before we buy Direct MFs, we should be doubly sure about the right products. For example, it is believed that ICICI Direct and Policy Bazaar sell direct plans; but it is not so. They sell only commission products.
If you are interested to invest in /switch to Direct Mutual Funds, please visit the link