Mutual Funds Investment : Direct or Index Funds

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Direct plans with lower expense ratio or a mix of index and actively managed funds for a higher return in the long run, is the best option for investment in mutual funds.

Back in 2012, SEBI introduced direct plans in mutual funds. It came into effect from January 2013, and from then mutual funds comes with two options Direct plan and Index plan. These are two options of the same mutual fund managed by the same fund manager who invests in same bonds and stocks. This introduction of direct plans enables investors to buy plans directly from mutual funds through online or through authorised branches, as there is no agent or distributor in between and are free from paying commission or broker fees.

Direct funds Vs Regular funds

Experts recommend investors to opt for direct plans as their returns are higher compared to regular plans, due to low expense ratio. And it’s better option for those who wishes to directly deal with fund without any intermediary. Experts advise that for those who wish to seek advises from an expert or if the distributor does regular follow up on rebalancing especially during volatile period regular plans are better.

For an investor who wishes to switch to a direct plan can do so by giving a common Transaction Form to the registrar of the investor’s asset management company (AMC). Also, investor’s can make use of the online platform of the AMC to do the switch.

The returns from regular fund compared to direct fund are lower. For an initial investment of Rs.10,00,000, the average 5-year return from the regular fund is 19.24%, whereas for a direct fund it is 20.34%. The final amount comes to Rs.24,10,515 for the regular fund and Rs. 25,23,771 for direct fund. No financial advisor will be provided to investors that choose a direct plan as in case of regular plans ie, the investors have to perform the research on their own in direct funds.

INDEX Funds

Index funds are another way to reduce the expense ratio. They buy the securities that make up an entire index. Index funds invest in indices is the same shares and proportion. The returns expected from index ratios are higher in the long run compared to other plans due to their lower expense ratio.

Index funds are getting slowly accepted in India. Brijesh Damodhar, managing partner, BellWether Advisors, says ” It is passive investing and if one wants to replicate the returns of the index, then one should invest in it”. The reason to invest in index funds should not only be the lower index rate but should be the investing process and approach and the need, he said. Before restructuring, any portfolio complete idea on asset allocation should be gathered for risk tolerance

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