The importance of extra savings is realised when markets are turbulent, and generating high returns becomes difficult. And over a period of time, these savings by the way of lower expense ratio become too substantial to ignore.

If you are investing Rs 10,000 per month in a direct plan of a mutual fund scheme through Systematic Investment Plan (SIP) there’s a possibility to make additional Rs 26.5 lakh in 20 years.

An avid reader of PersonalFN’s article will know the basic difference between direct plans and regular plans. But for the benefit of new readers, let’s revisit the basics.

Regular Plan —This is the conventional plan, where you invest/transact through your mutual fund distributor / agent / relationship manager. The recommendations are usually guided by the mutual fund distributor / investment advisor / relationship manager, and there is after-sales support and service. Indirectly, commission is paid by the fund house on the money you invest through distributors / relationship managers. Hence, due to the distribution cost involved, you incur a higher expenses ratio in a regular plan.

Direct Plan — On the contrary by opting for the direct plan, you eliminate the services of a mutual fund distributor / agent / relationship manager. There is no guidance. You do your own research or bank on mutual fund research reports to invest. The transactions can be performed online or even physically by visiting the registrar’s or the asset management company’s office. And since, transactions are routed directly; no commissions are paid by the fund house on the money you invest. Hence, the expense ratio for a direct plan is lower compared to Regular Plan.

PersonalFN studied the expense ratio structures of 178 prominent diversified equity mutual funds to understand the quantum of difference direct plans can make.

And here are some interesting observations

Regular Plans	No. of schemes
Schemes with an expense ratio of more than 1.5%	174
Schemes with an expense ratio of more than 2.0%	165
Schemes with an expense ratio of more than 2.5%	73

Sample size 178
(Source: ACE MF, PersonalFN Research)

Mutual funds incur high distribution costs and other administrative expenses which are passed on to investors in the form of higher expense rations.

As against that, when investors approach fund houses directly, there’s a great deal of saving, which too, is passed on to mutual fund investors.

Regular Plans	No. of schemes
Schemes with an expense ratio of less than 1.0%	27
Schemes with an expense ratio of less than 1.25%	67
Schemes with an expense ratio of less than 1.50%	104

Sample size 178
(Source: ACE MF, PersonalFN Research)

Some more observations

• Average difference between regular plans and direct plans is 1.0%. In other words, on an average, investing in direct plans results in savings of 1.0% p.a.

• The difference between regular plans and direct plans of newer schemes is higher than that between older schemes in many cases.

• The highest difference between a regular plan and a direct of the same scheme is 2.64%. This goes to show, some schemes are being promoted by paying huge commissions.

• However, it’s also observed that, some poorly performing schemes have a lower expense ratio under both, direct and regular plans.

So, it does not that mean, expense ratio is the only criteria to select a mutual fund scheme for your portfolio.

There’s much more to select winning mutual funds, watch this video:

You ought to be selective about choosing a scheme for your portfolio. Paying attention to your age, risk profile, investment objectives, financial goals, time horizon before goals befall, and asset allocation for you to have to the most appropriate mutual fund schemes in your portfolio that can help you accomplish your envisioned financial goals.

And finally when you invest, Direct Plans are worthy; but investing in direct plans of unworthy mutual fund schemes won’t help you increase your total returns. That’s where mutual fund scheme selection backed by thorough research plays a crucial role.

Moreover you need to timely evaluate the performance and regularly review your mutual fund portfolio.

Now, wouldn’t you be delighted if somebody else handles this for you for a nominal cost and helps you invest in direct plans?

PersonalFN’s soon-to-be-launched robo advisor may be your best bet.

Backed by its massive experience of well over 15 years in the financial market, PersonalFN has come up with an exclusive virtual investment advisor, uniquely built in such way that it knows the market -- and above all, it knows YOU!

You just got to follow these simple steps below:

1. Complete the registration

2. Submit necessary documents to activate your investment account

3. Assess your risk profile

4. Get a recommended portfolio based on your inputs

5. Invest with a single click

More reasons why you should invest through PersonalFN’s robo advisory platform

• It can help you reap extra returns since it provides only Direct Plans.

• It brings outstanding research experience of over 15 years. (Outperforming the BSE-200 index by 80 percent!).

• It comes at a pocket-friendly price.

Waiting for the launch of PersonalFN’s robo advisor?

Your wait is going to end soon!

Stay tuned.

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