How you can save lakhs by switching to Direct Mutual Funds

Now most of the new investors in the market looking for good return over long run are not afraid to invest in equities, specially through Mutual Fund route. However most of these mutual fund investments are through third party brokerage houses of banks like ICICI, KOTAK, HDFC etc.

When investors are investing in mutual funds through these route basically they are investing in “Regular Plans” of the fund houses. These Regular Plans attract extra charges due to various reasons like Distributor/agent commission etc.. Unknowingly retail investors are paying these charges which is making dent in their investments over long run. For e.g. expense ratio for Franklin India Prima Fund - Regular is 2.08% but the expense ratio is only 0.90% for the direct variation. The difference may be even more for other funds, you can try out with your own funds.

Few years back after SEBI’s instruction, all mutual fund houses had to launch “Direct Plans” for each oftheir funds. These direct funds have exactly same asset allocation as corresponding regular plans but charge is much lower for direct plans.

Let us take an example.

If a person invests Rs. 1,00,000/- every year in Franklin India Prima Fund - Direct option as mentioned above,  and saves around 1% in direct plan for 30 years, assuming 10% return he can earn around Rs. 3 lakhs more than the regular plan at the end.

There are two ways one can start direct plans. You can buy/start SIP directly in the respective fund house Websites. There are also few websites which provide platform to buy direct plans from different fund Houses. One of my favourite is “Kuvera (kuvera.in)” where you can not only buy lumpsum/start SIP, you can also see the performances of your fund in a dashboard and map your investments with your goals.

If you already have SIPs running for regular plans and wish to switch you can follow the below steps,

I. Stop the SIPs running for regular plans.

II. Redeem the units till a point which do not attract exit load.

III. Buy lumpsum amount of funds (direct plans) of your choice either from fund house websites

Or websites providing the facility to buy direct plans as discussed above (Kuvera, MFU etc).

IV. Start new SIPs with direct plans.