Direct Plan of Mutual Funds – Everything you wanted to learn about it !

A lot of buzz is going around “Direct Plan” when it comes to Mutual funds. A lot of investors still don’t understand the full impact of Direct Option and if they should invest in the same old way or with this new option. In this article – we are going to unearth all the aspects of Direct and Normal Option of investing in mutual funds.

Direct Plan in Mutual Funds

Direct Plan in Mutual Funds – What does it mean ?

SEBI few months back announced that all the AMC’s should come out with two options for each and every mutual funds scheme they have, One will be normal one (which you have been looking till date) , And Then the other option will be DIRECT PLAN, which will have a lower expense ratio compared to the Normal Option . This is because when you invest in mutual funds direct plan, there is no intermediary involved in between and a lot of costs which are associated goes away . That’s the reason direct plan will have less expense ration. So If I have to explain in one line. Direct option of mutual funds will have no agent in between , you will be directly investing with AMC . However with the NORMAL Option, you will be investing through an agent which can be any individual or a online broker.

A mutual fund scheme will have to affix “-DIRECT” word in their scheme name. So for example now there following options for investments if you want to invest in HDFC Top 200 mutual funds.

  • HDFC top 200 Growth Option
  • HDFC Top 200 Growth Option – DIRECT
  • HDFC top 200 Dividend Option
  • HDFC Top 200 Dividend Option – DIRECT

Bad News for Agents and Distributors because of less commissions

The whole distributor community (means AGENTS), is very disturbed because of this new development, because a lot of agents as well as financial planners rely on the trail commissions from their existing set of clients portfolio and now if their existing clients shift to the Direct Plans, its going to have a direct impact on their future commissions, because in Direct Plans there is no intermediary and there is no commission payout to anyone, hence lowering the expense ratio.

However its a biggest worry for those agents who are not adding any value through their advice and have HNI/big clients. Imagine an HNI investor, who has Rs 2-3 crore invested in Equity Mutual Funds, then Agent must be getting close to Rs 1 lac as trail commission each year (most of the equity funds have trail commission of around 0.5%) , which will just vanish the moment the HNI client shifts which portfolio to Direct option .

And guess what already Direct Plans are HIT among investors and a lot of investors and big corporate investors (who invest in DEBT mutual funds) have seems to have shifted to mutual funds direct plans. This is proved by the fact that in the first month of Jan – 2013 alone, 56% of the total incremental flow of 60,732 crores in mutual funds was through direct option, which is around Rs 33,830 crore, which means that out of total Rs 100 , which was invested in mutual funds, Rs 56 came in through Direct Plan and only Rs 44 came in through Standard plan, but the majority of that would be in Debt fund, but anyways – the point if that Direct Plans are already popular and investors have started taking the advantage.

Is Direct Option Superior in Terms of Returns ?

Now lets look at the returns from Direct Plans vs Standard Plans and lets see some aspects related to it.

Expense Ratio of Direct Plans vs Standard Plans

Expense ratio of a mutual fund has a deep impact on the final returns over long term. A small decrease in expense ratio can increase your long term returns by a very good margin, provided every thing else is same. Direct option of mutual funds are going to have a good enough difference when it comes to expense ratio. If you talk about equity funds, the direct plans will have anywhere from 0.40% to 0.75% less expense ratio compared to a standard plan . For example – If I have talk about HDFC Top 200 mutual fund , the standard plan has an expense ratio of 1.78% per year . Where as the Direct Plan expense ratio is only 1.19% , which is a 0.59% difference and whopping 33.15% less than standard plan , Means that you will save 33% costs when you migrate to Direct Plan of HDFC Top 200 as an example . Note that all the numbers I just quoted are as of 28th Mar 2013, and change in future. I checked few equity funds from HDFC Mutual funds and DSP Black Rock and found that that the ‘Direct’ option have lesser Expense ratio compared to their Standard Plans . Here is a snapshot for 5 funds.


Difference between Expense Ratio

expense ratio difference between standard and direct mutual fund

Difference in NAV ?

The Direct Plans took effect from Jan 1,2013 . Means that on Jan 1,2013 the NAV must be same for Direct and Standard Plan and from there, the NAV must be different for both plans. And As Direct Plan expense ratio is going to be lower, the NAV for direct plan should also be lower and the gap should widen too. To just make sure that its happening in reality. I picked up the same HDFC Top 200 and listed down the NAV for both standard as well as Direct Plan from Jan 1,2013 to Mar 26th 2013 and checked out the difference between them and I was correct . The NAV gap was growing and Nav in direct option was 0.13% higher than the standard plan NAV , thats just 3 months of difference and if you extrapolate in future, the difference might be as good as 0.5%-1.00% difference in a year. Thats a big enough amount, 0.5% on Rs 10 lacs portfolio means Rs 5,000 . Isn’t that a good ! . And if you look into very long term in your financial life , the difference will be very high, which we will see now

NAV difference between Direct Plan in mutual funds vs Standard plans

Impact on Wealth ?

Considering the same example of HDFC Top 200 and their expenses ratio of 1.72% (standard plan) and 1.29% (Direct Plan) , What happens to your wealth after 10,20,30 yrs if you consider these two options ? Will the corpus you will accumulate at the end will be huge ? Even if we assume a conservative returns of 10% on equity in long term, the difference in corpus at the end is huge because of sizable difference in the expense ratio. Below I have provided the corpus of two options and the difference between them over 10 yrs, 20 yrs and 30 yrs.

Direct Plan Mutual Funds Corpus Impact

Note that these numbers and difference might look big to you, but you will not realize the difference to be very big in a short term like few months of every 2-3 yrs. Also you might argue that one might not invest for such a long term, but we are only highlighting the impact of such costs and its impact in long run.

So, Now I hope you must be clear about the Impact of mutual funds direct plan on your wealth.

Who should invest in Direct Options

Now coming to the important question – Who should Invest in Direct option of mutual funds ? A lot of people might feel that direct plan is for each and every investor , but thats not right way of looking at it . Only those investors should go with the direct plan of mutual funds who are

  • Capable of choosing right mutual funds for themselves
  • Who are ready to review their portfolios all by themselves without anyone help
  • Those who can point to bad performing mutual funds and remove from their portfolio
  • Who are ready to invest with each AMC seperately

I guess a lot of people will fall into this category and would be ready to go the direct route for the kind of benefit they get out of it. However lets see who should not choose Direct Plan

Who should not Choose Direct Plan?

You must be wondering who should not invest in direct plan ? A lot of investors have very very good advisers , who have good capability to advice and record keeping abilities. The value of their timely advice is so much that it over weights the advantage of direct plan. So if you feel that you have an adviser who helps you pick good funds and helps you in removing bad funds over time and because of him you are able to get extra 2-3% returns on your portfolio, its worth paying commissions he deserves . Also It might happen that you are a busy person who wants a third party to handle your portfolio and inform you on time to time basis about your portfolio and whats going on where , you might want to consider not moving to direct plan.

So at the end , its about the question – “Is there any value in sticking with your adviser , platform or financial planner?” and if its adding enough value to your financial life , and do they deserve the commissions they get out of your portfolio with them. Its a question you need to ask yourself . Do not rush to convert your mutual funds into Direct plan .. Take some time to think over it and look at the long term effects of it.

How to invest in Direct Plan of mutual funds ?

The only thing you need to do is when you fill up the mutual funds investment form, there is an option called as “Direct Plan” there, all you need to do is put a tick mark there, If its ticked marked, then your investments will be into the DIRECT plan . Even if the agent/distributor puts his ARN code (the unique code which identifies a mutual fund agent) , he will not get any commissions from your investments. Also in some of the forms , that separate tick-mark option might not be available, in which case you have to mention the word “DIRECT” in the ARN column . Note that if you forget to mention that you want it to be under DIRECT plan and also the agent code is missing, by default the investment is going to be under mutual funds direct plan .

You can fill up this form directly with the AMC by going to their Office , or you can also use CAMS/Karvy for making investments , who are back-office partners for a lot of AMC’s . If you invest through CAMS/Karvy , still the investments will be into Direct plan, just make sure you do not leave the DIRECT unticked.

How to Change your Existing Mutual funds to Direct option?

Your existing investments in mutual funds will NOT switch to direct plans automatically, no matter you did it with an agent or directly with AMC (Read which AMC is better then other) . It will has the same expense ratio as of old funds.

To convert your existing holding from a standard to a direct plan, you need to submit a switch request. All you need to do is contact your AMC and ask for Switch reuest form . Which is a written request telling them that you want your existing mutual funds to be now converted into DIRECT plan . Once they get this request , they will process it , they will intimate you once its done . Your agent will not like you for this :) .

Will my existing SIP’s be considered under Direct plan by Default? ?

All the SIP’s which were made through an agent/distributor will still be under the standard plan , you will have to manually request the switch to Direct Plan . But if you had any SIP which was done directly with AMC (without involving Agent Code) , in that case your SIP’s  done after Jan 1, 2013 will automatically be considered under DIRECT plan , but all the old SIP’s which were done before Jan 1,2013 will still be there under Standard Plan and the higher expense ratio will apply there.

Can you convert your existing Tax Saving Mutual Funds (ELSS) under Direct Plan ?

If your tax saving mutual funds are still in lock in period , then you CANNOT convert them right now, only when the lock in period is over, you will be able to convert them into Direct Plan.

Will there be Exit Load applied when I move to Direct plan ?

Yes and NO !

If your existing mutual funds investments is through an agent/distributor , then there will be exit load at the time of switching them into a Direct version of mutual funds, but if your existing investments are through AMC directly, then there will not be any Exit Load while switching to Direct plan.

Important Points

  • There is no DIRECT option in ETF’s and closed ended mutual funds
  • There will be no difference between the portfolio’s of Direct Plan and Standard Plan . Every thing will be same except that the Direct plan will have a lower expense ration. Thats all !

Finally Are you going to invest into the Direct Plan of Mutual funds or going to continue with your old investments through an agent or distributor ? Please share your thoughts and inputs about it. What do you think about the Direct Plan of Mutual funds ?

262 CommentsAdd Comment

  1. Prateek

    Hi Manish,

    Nicely put up article!

    I have been investing through SIP in Axis Long Term through a distributor for an year. Now for switching to Direct, I understand that my previous units will be switched as and when their locking period of 3 years is over. But can I discontinue this SIP and start fresh SIP in direct (in same fund)? Will my folio no. change?

    Thanks for your help.

  2. stg

    Can we get all mutual funds under one room like the one offered by bank web sites? This is very important for a long term investor as in case anything untoward happens then the spouse who may or may not be in the know of all these things have to run from pillar to post to get the money. If it is a single portal at least the credentials can be shared with the spouse / nominee who can simply place a redeem request for all the funds.

    How easy or cumbersome is transferring the funds to one’s spouse name in the event of death?

      • stg


        I am using HDFC bank portal where I have all the funds in one place. In case of anything untoward happens, all the spouse needs to do is to go to the portal and redeem all the funds (assuming the bank account is jointly held) and the money is in the hands of the spouse.

        I was wondering if I can do something like this for direct plans, do we have any common platform for direct funds. I ask this question as we generally do not think of these things.

  3. Snehal

    i have a regular plan in one of the portfolio.. if i purchase any fund (Direct plan) under same portfolio then will i get the benefit of Direct plan? or i have the create a new portfolio?

    Thanks in advance.


  4. Gaurav

    Karthik, i am planning to open an account with funds India, whats your overall feedabck. Any better option than that?
    Brilliant article manish, crisp and easy to understand.

  5. Saravanan

    Dear Manish,

    I am currently investing Rs. 5000 “Quantum Long Term Equity Fund – Growth Option” (past 3 yrs) and planing to continue for next 3 yrs. I was investing 5000 for SBI Emerging Businesses Fund-Growth for last 1 yr and stopped now for no reason.

    Currently I am planing to invest on Rs. 2 Laksh (extra amount) on SBI Emerging Businesses Fund-Growth” and wait for 5 to 10 yrs. would you pls advise which one to invest on long term perspective (the current 2 Laksh)?


  6. Nilesh

    Very good article
    I want some good advisor’s to invest in sip
    Can u suggest some …
    I had discussed this with advisors of investment guru/ funds india etc
    But I don’t know about their support post purchase
    Pl guide

  7. Krishna

    Isn’t the NAV difference applicable for purchasing units also? For direct plan, we get lesser units with the same amount because its NAV is more. I am not sure the extra savings projected above takes this into account. Can you please clarify?

  8. VB

    Very new to MF so please pardon my ignorance. If I buy a direct MF from say Franklin templeton, how do I set up a SIP? Is it like autopay think that we have on Internet banking portal (biller management) or does it work differently?

  9. Kauhik

    1) How can I get consolidates statement about all my mutual funds ?
    2) From this article, it seems one can keep the same broker and can switch all MFs to direct and new SIP can be DIRECT. Please confirm?
    3) Any comment on ScriptBox ?? –

  10. Nitin

    dear manish.
    nj invest (share broking co.) provide facility for MARS(mutual fund auto reblancing schem) what u say about this schem. Which we need to invest initial one lac in regular plan in different mf.
    Thanking you

  11. Karthik

    Hi Manish,

    Right now i am investing in different AMC’s through fundsindia. Which I feel convenient in terms of managing my portfolio. Their service and advisory are good. But still that did not justify me to continue in regular funds. But I definitely lazy enough to maintain accounts in different AMC’s and I feel i may get lost in term of portfolio follow ups.

    Then I came to know about MFUtility. But I am not sure about its features and services. Can you please share your thoughts about it? Is there any one successful investor in your vicinity who had opened the account and managing portfolio. Please share some light…


  12. bhushan

    hi Manish,
    nice article. let me know if your company provides a service as financial adviser who can provide advice on where to invest/which MFs to buy and then I can invest in direct plans of those MFs.

    I am looking for financial adviser rather than financial broker (who will advice me to invest most of the time in MFs where he gets maximum commission).


  13. Harshal

    Hi Manish,

    I am planning to open a MF account in ‘Axis Long Term Equity Fund (G)’. After reading this article, I am confused whether to go for Direct plan. One more thing, the growth fund is ranked 1 on money control unders ELSS category. But for the direct option fund is not ranked by crisil on moneycontrol. Any specific reason?

    Please suggest with which option shall i proceed?


  14. Nitin

    Very good artical as well que. Ans.
    My que. Is I have started sip 25/03/2015 in birala sunlife front line gr regular plan, through adviser he said company provide me additional benefit, insurance under cetury-sip promotion plan, but after investment. I come to know abt MF direct plan. So now I want to switch it from regular to direct, how s it possible. Should I create new sip and switch amt of this existing sip into new one.

  15. Nitin

    Very good arrival as well que. Ans.
    My que. Is I have started sip 25/03/2015 in birala sunlife front line gr regular plan, company provide me insurance under cetury-sip promotion plan, but after investment I come to know abt MF direct plan. So now I want to change it from regular to direct how s it possible. Should I create new sip and switch amt of this existing sip into new one.

  16. pawan yadav

    Hi Manish

    I have a HDFC TOP 200- Growth fund and i bought it throught he HDFC BANK in march 2013. I pay monthy 10,000 as a SIP. I have couple of questions:

    1. Do my agent/middleman change my portfolio time to time. I am asking this as i do not get any call as such. So i assume its by default they add/remove and my understanding correct?

    2. If the above understanding is correct , then if i take direct fund then i myself need to add/modify my portfolio as per the market condition? what if i just buy a SIP option through AMC and do not touch for 10 years[ i mean no add/delete in portfolio]

    lastly ,do u suggest me to move to direct ?

  17. Vishnu Khandelwal

    Hi Manish

    Very helpful artical…. Simple and crisp.
    I am investing in SIPs basically ELSS first time. I am wondering that since the NAV is higher in Direct Option, will I receive less units every time?

Leave a Comment