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Are Mutual Fund Direct Plans cost effective?

As you would be aware, mutual funds had introduced Direct Plans from Jan 2013 onward. So now you had two options to invest in MFs. 
- If you availed the services of a distributor you would invest in the Regular Plan of a given mutual fund scheme. 
- But, if you invested directly with the mutual fund company, your investment would be in the Direct Plan of the said mutual fund scheme.

In terms of the fund per se, both the Plans were exactly the same. Hence the portfolio and the basic returns would also be the same. The only difference was the charges applied. As there was an intermediary involved, the charges in the Regular Plan were to be somewhat higher than the Direct Plan. Consequently, the post-charges returns in Direct Plan were to be somewhat higher than the Regular Plans.

The pros and cons of going Direct are as under:
Advantage : Lower fund expenses, which translate into higher returns.

Problem : (a) You have to choose the funds yourself. There is no advice available. (b) You have to separately deal with each AMC and (c) Portfolio Tracking

Solution : (a) Seek help of a fee-based advisor. (b) The cost saving will be immense with passage of time. So make a one-time effort to set-up online account with 5-7 top AMCs. (c) Many online portals allow free portfolio tracking.

Now that one year is over since this system was introduced, let us evaluate the impact on the returns.

Equity Schemes
Analysis of around 275 funds gives the following results:
- Min difference in returns was 0.05%
- Max difference in returns was 1.68%
- On an average Direct Plans gave 0.61% higher returns than Regular Plans

- In 23 schemes (i.e. around 8%) the difference was more than 1%
- In almost 47% cases the returns were higher than the average of 0.61%.

Debt Schemes
Analysis of about 200 funds gives the following results:
- Min difference in returns was 0.01%
- Max difference in returns was 1.54%
- On an average Direct Plans gave 0.40% higher returns than Regular Plans

- In 26 schemes (i.e. around 13%) the difference was more than 0.75%
- In almost 45% cases the returns were higher than the average of 0.40%.

So 0.40-0.60% is the indicative cost that you could incur when you opt for the convenience of investing through a distributor. If your portfolio size is big, say exceeding Rs.10-12 lakhs and your time horizon is around 4-5 years or more, then you could save decent amount of money if you go direct. Else, distributor route is fine.

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