How to spend less on mutual funds? Buy a direct plan

Why does a consumer product cost cheaper at a wholesaler and dearer at a retailer? Because by the time the product reaches a retail shop, you have middle men interfering. Similarly, when you buy a mutual fund, if you approach a middle man, that is, a distributor, you will have to shell out more on commission compared to the same MF plan when you buy it directly from the fund house. So, if you make an effort to cut the distributor's role in MF purchase, and buy it from a direct source, you will naturally end up earning higher on your MFs.

That said, there are two options to buy an MF scheme having the same portfolio and fund manager - direct mutual fund and regular mutual fund. If you are sure in which MF scheme you have to invest, you should directly buy it from the Asset Management Companies (AMCs). But, if you buy it via a distributor, you end up buying a regular MF scheme with a higher expense ratio.

"When mutual funds were launched in India, investors needed to purchase units via a distributor or an agent. The option of purchasing directly from the AMC was not available. Hence, that became a practice. With the inflation rates rising and the demand for better returns increasing, Sebi decided to make it mandatory for AMCs to offer a direct plan where investors could buy units of mutual funds from the fund house without going to a distributor. This would help them save on commissions. Over the long-term, this amount when saved and invested would fetch them higher returns," says Harsh Jain, Co-founder and COO, Groww, an online mutual fund investment platform.

Cost comparison - Direct versus regular

The expense ratio on SBI Bluchip Fund is 1.9 per cent and 1.04 per cent on its direct plan. On the face of it,  the difference doesn't seem big. However, factor in compounding over a long period of time, and you will see the difference. For example, if you invest Rs 1 lakh lumpsum in the SBI Bluechip Fund, the regular plan will fetch you 27.22 per cent or Rs 127,218 in five years, while the direct plan will earn 33.83 per cent or Rs 133,831.

The longer the investment period, the higher the difference will be. "Let's assume an expense ratio of 0.75 per cent in a direct plan and 1.75 in the regular plan. If an investor invests a lumpsum Rs 10 lakh in an equity fund for 15 years and the fund gives an annualised return of 15 per cent over the next 15 years, the direct plan will give you close to Rs 73.7 lakh versus a regular plan which would earn Rs 64.6 lakh," says Saumya Shah, Founder, Tarrakki.com, a wealth-management platform.

How to buy a direct mutual fund

The best way to buy a direct mutual fund is directly from the AMC website. However, you will have to visit individual websites of AMCs each time you have to review your investments. Alternatively, you can buy direct plans from the websites of registrars such as CAMS and Karvy. But not all schemes will be available on both. MF Utility is another option, which is an aggregation platform jointly owned by various asset management companies. Besides, market regulator Sebi, earlier in February, allowed investors to directly buy and sell mutual funds from stock exchanges -- BSE Star MF and NSE NMF II.

Finally, with the advancement of technology, new-age fintech players such as PayTM Money, Zerodha Coin, Groww, Tarrakki.com, Kuvera and Mobikwik also offer direct plans on their platforms. Some are only app-based while others have web versions as well. With these platforms, you can review all your MF investments at one place.

What if advice is needed

If you think you cannot pick quality MFs on your own that align well with your financial goals, you should prefer a fee-based financial advisor over a distributor. A fee-based advisor can help you choose MFs and invest in their direct plans on your behalf. You may do it yourself as well after consulting with them the investment avenues. "Investors should always opt for investment advice from a professional if they want to invest in a direct plan. There are several fee-based advisers, who can guide the investors in selecting the right funds and aligning them to their financial goals," Shah of Tarrakki.com says.

Also read: SBI's liquidity ratio at 143%: Either nobody wants money or bank doesn't want to lend

Also read:Reliance Industries' rights issue share debuts at Rs 690