House View. Does a direct plan give you more?

In a recent circular, market regulator SEBI directed all mutual fund schemes to compulsorily disclose the expense ratios of both direct and regular plans separately to their investors.

From October 1, in the six-monthly consolidated account statement, fund houses will have to provide the expense ratios of the direct and regular plan for each scheme.

In early 2013, SEBI had directed all mutual funds to compulsorily launch ‘direct’ plans in all existing mutual fund schemes, to reduce costs for seasoned investors. While the regular plans would include commissions of the agent/distributor as part of fund expenses, the direct plan expenses and NAVs were to be computed without charging distributor commissions.

Given that it’s three years since direct plans were first kicked off, how do returns on them compare with regular plans? Latest data shows that there has been a difference to the tune of 0.75-1.5 per cent a year for the leading large-cap equity funds over the last three years.

For instance, the direct plan earned 0.9 per cent higher (annually) for Franklin Bluechip, 0.8 per cent for Reliance Vision and 0.5 per cent for UTI Mastershare in this three-year period.

On an average, the annual expense ratio of direct plans was 1.95 per cent compared with 2.65 per cent for regular plans, according to the latest data by NAV India.

Here’s an illustration of these differential returns.

Higher returns

If you had invested ₹1 lakh in the direct plan of Birla Sun Life Frontline Equity three years ago, you would have seen it appreciate to ₹1,68,941 by now. However, if you had chosen the regular plan, your investment would have appreciated to ₹1,64,303. That’s ₹4,648 lower than that for the direct plan. There are two factors that contribute to this difference. One, lower expenses lead to a higher NAV, which in turn prop up returns. Two, the higher balance in your account then compounds, offering a higher return over many years.

Investors didn’t have disclosures on expense ratios so far from all the MFs (only a few have been disclosing them). They will now have access to this information from their account statements. Investors can ensure that the savings they make from direct plans are indeed sizeable.