How Much More Can You Save With Direct Mutual Funds?

We love bargains! Sales and discounts on our favourite products are a major reason why we shop online. Shopping sales are of course advertised very prominently and we know how much we are saving. What if we told you that you can save a lot on your mutual fund investments too?  

Let us tell you a small story. Yamini works in a bank and understands personal finance. She knows the role that mutual funds play in creating wealth. But however has very little time to manage her investments and prefers to invest in mutual funds through her bank. She knows that her bank as a corporate agent charges commission for the investments but does not pay any attention to it thinking that the amount is far too small every month for her to worry about.

She has a running Systematic Investment Plan in HDFC Equity Fund Regular Plan and a few other schemes. 

On the other hand, Shruti is a homemaker. Once her housework is done, and her husband and children have gone off to work and school she has enough time on her hands. She has become interested in investing over the past few years and keeps track of the stock markets and changes in the mutual fund sector. She knows that Securities and Exchanges Board of India (Sebi) has made it possible for investors to invest directly in mutual funds without commissions and there are separate net asset values for schemes through regular route (that includes agent commissions) and direct route (without agent commissions). 

She also puts money monthly in HDFC Equity Fund Direct Plan and some other schemes. 

Now let us look at the returns that both have made over the years. We will track the investments from 2013 onwards when the concept of direct plans and regular plans were introduced. Assume that both have been investing Rs 1000 every month in HDFC Equity Fund. 

The start date is Jan 1, 2013, the end date for the SIP is May 31, 2019, and both would have invested Rs 77,000 each during that period. At the end of the period, Yamini’s investments have grown to Rs 122,657, while Shruti’s has grown to Rs 126,528. That is a difference of Rs 3871, which looks like a small amount. 

In reality, both women would have invested much more than Rs 1,000 a month. Let us see what happens if their investments were Rs 10,000 per month. Now both would have invested Rs 7.7 lakh each. As on May 31, 2019 Shruti’s investments would be worth Rs 12.65 lakh while that of Yamini would be worth Rs 12.27 lakh, a difference of Rs 38,000. That’s a bigger number right? With that money you can buy the Samsung Galaxy S8, a 350 litre Bosch refrigerator or a Dell Vostro laptop. 

As the investment amounts get bigger the difference between what you get from investing in a regular plan (with agent fees) and direct plans (without agent fees) widen. Of course, there are a number of factors that investors need to take into account when they make the investments such as the investment philosophy of the fund, its objectives and how the fund manager manages the scheme through volatility and tough times. But we are not exaggerating when we say that the difference between direct plans and regular plans can run into lakhs. 

Investors have the option to make their direct investments on the websites of the mutual fund, on the website of the registrar and transfer agents such as CAMS and Karvy, at their offices or on platforms such as Groww. 

Groww offers both an online and an app option depending on the comfort level of the investor. The advantages of investing via Groww are manifold. First of all, there are no agent fees so your entire corpus is invested. Second investors can do your research on the platform itself before they decide where to invest. There are a number of analytical tools they can use to figure which is the best scheme for them and their goals – such as performance, rating, returns, size of the fund, debt, equity etc. 

Be smart about your money and go direct!  A good bargain, eh? 

The author is the Co-founder and Chief Operating Officer at Groww