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Need to Shun “Regular” Plans to Grab Advantage of “Direct”

“In year 2012, to increase penetration of mutual fund products and to energize the distribution network, SEBI allowed to levy additional expenses up to 30 basis point on the inflows from beyond top 15 cities.  After more than five years’ regulator has now decided that the additional TER of up to 30 basis points would be allowed for inflows from beyond top 30 cities instead of beyond top 15 cities. The flows from Next 15 cities are study and the range of 5 to 6 percentage of Total assets under management. Again in same year i.e 2012, SEBI mandatorily introduced of Direct & distributor sold plans for each MF scheme.

Since them, popular media often write about direct plan’s superiority in terms higher returns and lower expense over broker sold or regular plans. Kumar Dhirendra (2017) argues about why direct plans are not suitable to naïve investors. Typically, the flowchart shown through figure below depicts investor’s choice to opt for regular plan or direct plan.

Source: Nathan Narendra (2017)

Retail Investors typically do not have abilities about asset allocation, fund selection. This inability coupled up with reluctance towards paying advisory fees push retail investors to opt for regular plans.

Nathan Narendra (2017) shows the average three-year performance differential between direct and regular plan ranges from 0.5 to 4.08 percentage depending on the fund category.

Let us take a hypothetical situation if all retail investors in October 2014, would have remained invested in MF regular products then, they would have lost more than 6000 crore (refer Table below).   

 Type of the product Retail assets under Regular Plan (as on October 2014) Average Higher returns* Monetary loss as on October 2017
 Liquid/ Money Market 2500.98 0.5 12.5049
 Gilt 310 2.46 7.626
 ELSS 26536.19 3.91 1037.565
 Others 114926.67 4.12 4734.979
 Balanced schemes 8011.34 3.7 296.4196
 Total 152285.18 3.99 6089.094
* The difference in the average returns of the direct and regular plans of each category has been used for calculations. Only schemes with AUM of at least Rs 100 crore were considered. Source: Value Research. Figures are as on October 2017. 

 The corresponding figures for corporate investors and HNIs are INR 1833 crore and INR 3787 crores.  The retail investors are biggest looser.

 I will not deny importance of regular plans in underdeveloped (in terms of awareness, infrastructure) markets. 

It is right time to stop selling regular plans in Top 15 or at least in top 5 cities. The ecosystem needed for direct plans is ready due to eKYC, mutual fund portals, trading platforms like MF Utility, platforms from exchanges, etc. The step will be pro investor in long run. Typically, an investor loose by investing in regular plans. Though there are some intermediaries offering direct plans through fee based model but the moot point is retail investor’s unwilling to pay fees. But a campaign like “Mutual Fund sahihai” can create a traction in the category then just extrapolate about another campaign on the lines of “paying advisory fees is right”

Though this step will be considered very bold. But “banning entry load” in Mutual fund industry was also very bold step taken in the past by SEBI.

Certainly MF companies will resist. Rather MF companies are busy in creating novel ideas to incentivize channel members (Do read a news in Business Line titled “Breach of trust” or follow the link

The key is regulator’s volition.


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