Recently, SEBI came out with a consultation paper reviewing the Total Expense Ratio charged by AMCs and the need to rationalize them. You can check the detailed paper here on SEBI website.
But there was one interesting insight in the SEBI paper comparing how Direct plans do much better than regular plans when it came to outperforming their benchmarks.
Here is the dataset (table below), which may look too heavy at first, but stay with me and it will be clear as night and day:
The table shows the proportion of schemes that are underperforming and overperforming their respective benchmark indexes. Here are noteworthy points:
- If you look at the 1-Year returns column, it says that 17.23% of the Direct Plans and 25.75% of regular plans underperformed their benchmark indexes by more than 1.25%.
- In the same 1-Year returns column, you will see that 26.04% of the Direct Plans and 32.24% of regular plans underperformed their benchmark indexes by 0 to 1.25%.
- Combining the above two points and looking at schemes that outperformed the benchmark, the table tells that almost 57% of direct plans and 42% of regular plans outperformed their benchmarks.
This was about the 1-year returns which is a short term investment horizon. Since most of us invest in mutual funds for the long term, let’s have a look at longer investment horizons of 5-10 years to see how direct funds beat regular funds when it comes to outperformance.
- If you look at the 5-Year returns column, the table shows that almost 45% of direct plans and just 26% of regular plans outperformed their benchmarks.
- If you look at the 10-Year returns column, the table shows that almost 66% of direct plans and just 39% of regular plans outperformed their benchmarks.
This clearly shows that if you extend the investment horizon and then analyze, then as per SEBI’s data in the consultation paper, direct plans do a lot better than regular plans.
While a more detailed data would have given further insight, it is still very clear what the SEBI data is pointing to. More and more direct plans beat their benchmarks than regular plans of the same schemes. So there is a clear case for investing directly via direct funds if you know how to pick suitable funds or you have a SEBI-Registered Investment Advisor (Fee Only RIA) who is advising you.
I have written about this aspect earlier as well. Sharing the summary here (with links to detailed articles) here for completeness of the discussed topic:
- Returns of direct plans will ALWAYS be higher than regular plans of the same fund/scheme. That is, direct plans will always outperform the regular ones.
- The NAV of Direct plan will always be higher than that of Regular plan of the same fund/scheme. Since the Direct-NAV is higher than Regular-NAV, you will get lesser no. of units for direct plans for the same amount invested. But still, your returns will be higher than those of regular plans. Read more about it here – Regular vs Direct Plan NAV.
Under direct plans of the mutual fund schemes, you invest directly with the mutual fund house (AMC). And since there is no intermediary or distributor involved in between, the commissions are saved. And this reflects in lower expense ratio of the direct plans – which in turn, reflects in better returns as compared to the regular plans. All else remains same. The fund manager, the portfolio of stocks, everything remains same.
If you are still investing in regular plans for any reason, then you should know that regular plans need to pay MF distributor commission or fee, which eats into the performance of the regular plans, thereby reducing their ability to beat the benchmarks – which is clearly shown in the SEBI data earlier.
So if you are an investor who doesn’t want to lose out on these additional returns which are available for direct plan investors ‘only’, then you should switch to direct plans as soon as possible. But as I said earlier, it only makes sense for you to get into direct plans when you either know how to pick right and suitable mutual funds OR you are getting proper advice from SEBI registered investment advisors.
The case for investing in mutual funds via direct plans only is clear. It is just about when you realize it and make the switch from regular to direct funds.
Disclaimer – The views expressed above should not be considered professional investment advice or advertisement or otherwise. No specific product/service recommendations have been made and the article itself, is for general educational purposes only. The readers are requested to take into consideration all the risk factors including their financial condition, suitability to risk-return profile and the likes and take professional investment advice before investing.