What are direct plans?
There is a new regulation from Securities and Exchange Board of India (SEBI) which says every MF scheme must have a direct plan as well. This basically means investors can buy MF scheme units directly from the fund house without any broker/distribution house/agent etc. from 1 January 2013.
As the middlemen are eliminated, these will have no distribution and commission expenses. Therefore these schemes will have a lower expense ratio. SEBI has instructed the AMCs to declare distinct NAVs for these. As the expenses are lower, the returns on these schemes could be slightly higher than the same schemes sold by a distributor.
What are the advantages of direct plans for the retail investors?
Today if an investor buys directly from an AMC, the distribution expenses/commission falls into the hands of the AMC. With the new ruling, AMCs have to offer direct plans with distinct NAVs separately. This means the cost of investing for the investors is less. Since expenses for the AMCs are lower for such schemes, NAVs and returns should be higher. Industry experts estimate that this could translate to yields being higher by 0.5%-1.25% for retail investors per year.
What should the retail investors be cautious about? What are the disadvantages of direct plans for them?
Lay investors who are not well versed about investing in mutual fund products should not buy direct plans right away. They need to do their research thoroughly. They need to understand where the scheme fits in their portfolio or in terms of asset allocation.
All the documentation would have to be handled by the investor alone like getting the forms, filling it, attaching relevant documentation, sending it to the AMC and then ensuring that purchase and sale related proceeds and documentation each time is in place. Monitoring the NAV movements; keeping a tab on charges, revision of portfolio, changes in expense structure and maintaining all documentation will be the responsibility of the investor. These responsibilities are not easy for lay investors or first time investors. Changing from your existing plan to a direct plan would have tax implications. You should also think of SIPs that are already in place for existing plans.
Savvy investors can take advantage of direct plans. We would recommend a wait and watch policy in the beginning of next year and keep track of benefits on schemes that you already have before taking the plunge. #gettingyourich