It has now been more than a decade since the Securities and Exchange Board of India (SEBI) flagged off the direct route to investing in mutual funds, which required all schemes to carve out a separate plan where distributor commissions would not be charged to the investor. Direct plans have delivered a good return experience, with annualised returns that are 50-200 basis points higher than regular versions of the same schemes. But with the industry making no special effort to promote the direct route and fee-only advisors (who forego product commissions and collect their fee from the investor) shrinking in number, investor awareness about direct plans remains patchy.
SEBI’s latest draft circular proposing to amend SEBI (Mutual Fund) Regulations 1996, to mandate that details of direct plans be disclosed separately from those of regular plans in the half-yearly disclosures of mutual funds seems aimed at addressing this gap. The draft circular proposes that mutual funds, when disclosing their unaudited half-yearly financials start putting out the expenses, expense ratios, returns and yields of their direct plans separately. However, investors do not commonly refer to half-yearly accounts published in newspapers or on AMC (asset management company) websites when making decisions to buy mutual funds. Return data in the half-yearly accounts are too sporadic to help in investing decisions. Therefore, SEBI may need to expand the scope of direct plan disclosures.
For one, even after this change, there will remain several SEBI-mandated performance disclosures by mutual funds, where direct plans don’t get any specific mention. This needs to be corrected. For instance, all AMCs are supposed to maintain updated dashboards on their websites that disclose assets managed, expense ratios and past performance of their schemes. This dashboard should be required to feature data on direct plans, not just regular ones. Performance advertisements of mutual funds today capture data on one-year, three-year, five-year returns along with the current value of ₹10,000 invested at inception. Direct plan data needs to be distinctly disclosed here too. Two, new investors shy away from direct plans believing that they are more ‘expensive’ than regular plans because of their higher Net Asset Values (NAVs). In reality, NAVs of direct plans rule much higher than regular plans due to the cumulative effect of absorbing lower charges over the years.
Rather than the current NAV, investors ought to be focusing on the fact that future returns from direct plans will likely be superior to regular plans. SEBI and AMFI-funded awareness campaigns can play a role here. While trying to popularise direct plans, SEBI should also be conscious of the fact that investors who are entirely new to mutual funds should not be making a beeline for direct plans without proper guidance. Presently, this is what happens when new investors directly buy funds from AMC websites or execution-only online platforms run by brokerages.