Direct plans of equity mutual funds proves to be a rewarding option

Three years since their launch, direct plans of equity mutual funds (MF) have delivered the promised returns.

Data shows that since January 1, 2013, these plans have delivered on an average 0.9% extra cumulative annual growth rate ( CAGR) to investors over that offered by traditional plans of the corresponding equity schemes for the same period.

A handful of direct plans have delivered an excess 1.5% CAGR owing to the saving on distributor’s fees. With direct plans, the investor buys units in a MF directly from the fund house, instead of going through a distributor.

In value terms, this return differential has added a good sum to the corpus of investors. For instance, Rs 1 lakh investment in the regular plan of Religare Invesco Midcap Fund on January 1, 2013 has grown to Rs 1,92,861.



However, the same investment in the corresponding direct plan would have grown to Rs 2,00,680. (See table) Over a year, direct plans charge 50-70 bps (1 basis point is 0.01%) lower expense ratio, owing to the saving on distributor’s commission.

These savings will get compounded over many years. However, experts warn investors against focusing only on the difference in expense ratio while investing in a direct plan.