Every mutual fund offers a direct plan and regular plan to investors. Both the plans are identical, but the major difference is returns offered by them. Mutual fund advisors have taken a subscription from several mutual fund (MF) companies such as HDFC mutual fund, SBI mutual fund, etc. They also force you to buy mutual funds from them so that they can earn a subscription from the MF companies. They suggest you to opt for SIP vs lump sum so that they can earn a commission, ranging from .2% to .5% depending upon the mutual fund company. These advisors also earn a commission on every SIP paid by you. However, SEBI has recently launched a series of reforms to bring transparency in mutual fund and the advisory business. Some of the advisors recommend those mutual funds from which they get a higher commission from mutual fund companies, regardless of your need and risk appetite. This can be dangerous, especially if you near to your retirement age and should invest in debt mutual funds or opt for assets having guaranteed returns with minimal risk. It also leads to jeopardizing your portfolio. Many advisors also charge a commission for financial planning besides taking a commission on the recommended products as they earn on every SIP you pay for.
The commissions are only deducted from every SIP paid by you. However, SEBI has tried to address the commission disclosure, but it has not helped to clean the air. There are also several platforms offering mutual funds such as Zerodha, Upwardly, Scripbox, etc., but these platforms also charge a one-time commission or offer regular plans while earning a huge commission on every SIP. Let us look why direct mutual fund plan is better than regular plans offered by these advisors:
- Zero Commission and high returns: As per secondary sources, every mutual fund advisor has doubled his/her wealth during 2015-2017. In fact, they earned more monies that you had made via SIPs. When you invest in a regular plan, a big chunk is deducted from every SIP in form of expense ratio charged by mutual fund managers to manage your investments and a commission which is given to the advisors. These commissions do get unnoticed by you, but you can prevent these commissions by opting for direct plans offered by mutual fund companies. The returns can range from 2-3% in the long-term and 1% in short-term scenario. For a direct mutual fund, you have to pay a one-time fee and there is no hidden cost or commission.
- Advisory Services: The advisors do a lot of miselling to increase their margins from mutual fund companies as they are increasing the Assets Under Management (AUM) of the mutual fund. They might persuade you to buy a particular mutual fund and do not offer a transparent advisory as per your financial goals, investment horizon and risk tolerance. On the flip side, you can opt for the direct plan of mutual fund keeping in mind your financial objective and risk appetite. Do conduct a rigorous research of several mutual funds before opting for them.
- High Returns: Direct plans do involve a complicated documentation process to submit the KYC and other relevant documents to mutual fund companies, but everything in online now, and you can follow the steps and start investing in direct plans. By way of reducing the expense ratio, you can also select the top-performing fund and increase the returns over time.
Investment in direct plans is made through AMC only, without intermediary/mutual fund brokers. You should directly through AMC’s website to increase the returns and make the most of your money.
Think Long-term, Stay Invested!