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As investors get market savvy, more opt for mutual funds' direct plans

Investing in mutual funds without the aid of a distributor — or the direct mode — has shown pronounced improvement in the past five years

, ET Bureau|
Oct 07, 2019, 09.24 AM IST
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Investing in mutual funds without the aid of a distributor — or the direct mode — has shown pronounced improvement in the past five years. Total investments in mutual funds through this mode rose to 43 per cent in August this year from 38 per cent in August 2015, data gathered from the website of the Association of Mutual Funds in India (Amfi) showed.

On investments in equities through the direct mode, there has been growth of 7 percentage points. Investments in equities through direct mode improved to 17 per cent this August from 10 per cent in August 2015.

Interestingly, individual investors and HNIs are increasingly adopting the direct mode of investing in mutual funds schemes, especially equity. The percentage of investments of individual investors in equity schemes through the direct mode improved to 9 per cent in August this year from 5 per cent in August 2015. Analysts believe there are four reasons behind this increasing preference for the direct mode.

The first is a more favourable cost structure, best understood in terms of total expense ratio.

Expense ratio on direct plans is cheaper than in regular plans, with the former not having to factor in commission expenses to distributors. Direct plans, as the expression suggests, are sold directly to investors. For instance, a large cap regular equity scheme may have an expense ratio of about 1.89 per cent, while its direct plan would have an expense ratio of only 1 per cent.

Then, industry veterans say that direct schemes have often given better returns than regular plans — in the range of 1-2 per cent. This gap in earnings, over a long period, could mean substantial gains for an investor. Third, various marketing and awareness campaigns (Mutual Funds Sahi Hai, for instance) about investing in these instruments have also helped draw investors to the direct mode of investing in this particular asset class.

Finally, over the past five years, mutual fund houses have devised apps dedicated to mobile applications, making it easier for investors to buy products directly.

Increasing acceptance of these applications has boosted investments in mutual funds through the direct mode.

Over the past five years, the share of retail investors in total investments through the direct mode has improved to 12 per cent in August this year from about 10 per cent in August 2015.

Separately, high networth individuals are quickly adopting the direct mode of investments. Their share of total investments in mutual funds through the direct mode has climbed to 21 per cent in August this year, from 15 per cent in August 2015.
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