Earlier to January 1st, 2013, Indian mutual funds have only variety called standard or regular mutual funds. They are sold via agents, distributors, banks etc. and Asset Management Company (AMC) aka the mutual fund house pays commissions to these third party entities for bringing in investments/business. Based on the relationship and AMC, there are two types of commissions; One being upfront commission after first sale and later trailing commissions, i.e. commissions are paid to distributing entity for some more time after first sale. This way agents/distributors get money via commissions and AMC gets its business via more marketing and pushing the mutual funds to retail investors. All these expenses are not borne by the AMC but its by you the investor who bears it. It is called the expenses ratio over NAV which is charged to the investor once you buy the mutual fund. Daily NAV is declared only after deducting the expenses from the mutual funds return. This expense ratio varies from 0.5% to 3.0% or more varying among different mutual funds.
SEBI came in to benefit of retail investors by mandating all AMCs to introduce DIRECT option for each mutual fund. Those funds are suffixed with "-DIRECT" in the fund name. So all AMCs started this option starting from January 1st, 2013. The main differential is expense ratio as compared to standard mutual funds. AMCs can provide this less expensive option only by selling them directly and by not paying commissions to 3rd party entities and no marketing expenses incurring. That is the reason, you will not hear much about these DIRECT funds. It is obvious that if expenses are less, the returns are more and more benefit to the retail investor. How much benefit by investing in DIRECT option compared to REGULAR option? Now it is almost close to 2 years after DIRECT funds are introduced and returns should speak for it self. Below table gives you some idea how returns differ for last 1 year between Direct and Regular options.
Source: Valueresearchonline.com
Date of NAV: 29-OCT-14
Criteria: Some well known 5,4,3 star rating funds in Large Cap, Large cap & Midcap, Midcap & Small Cap, Multi cap and Equity oriented Hybrid/Balanced funds categories.
As you can see the returns vary from category to category and averaging among them gives 1.18% For simple comparison purpose, let us take 1% in returns difference between direct and regular option. This 1% looks very minimal at up front. However if you compound just 1% over long term, it makes huge difference. If you are SIP investor, it makes much more huge difference.
e.g.
1,000 rupees one time investment compounded for 15 years gives 7,137.94 at 14% and 8,137.06 at 15%. A difference of 999.12. Refer Compounding is your friend article for more combinations of duration and rate of returns.
If you are a SIP investor and 1,000 rupees invested monthly for 15 years gives 6,12,853.78 at 14% and 6,76,863.09 at 15%. A difference of 64,009.31, which is definitely a huge difference. Refer SIP it slowly article for more combinations of duration and rate of returns.
Why get less returns when you know the same mutual fund with different option gives far more better returns at longer duration. In fact investing is for long term and savings is for short term. Only effort you need to put initially is visiting the AMC website and downloading application forms and providing KYC details. This is one time job. Each AMC have their own requirements. I guess you can put this little effort considering the outcome at the end. Now a days, all AMCs have provided on line transacting facility to buy mutual funds for one time or regular bank transfers.
Go for Direct option for your next mutual fund purchase and earn better results. Happy Investing.
