‘Transparency breeds participation, and communication fosters trust’. This dictum is vital and relevant for all aspects of life, and more so for financial instruments. Take the example of Stock Market; when you purchase shares, your contract note will clearly spell out the smallest of detail – service tax, VAT, STT, brokerage, and others. Screen price of the stock and landing cost to the buyer is clearly and succinctly illustrated. Has this hampered the stock industry? Has this hampered the broking fraternity? No. On the contrary, markets have been growing, and more and more investors are participating in stock investments.

Why should Mutual fund industry be any different from this? Today, when you purchase a mutual fund, all you will get is the price and units in your statement. You won’t even get to know the expense ratio of the scheme. You don’t know if your distributor is making some money out of your investments, and you surely don’t know if there is a better way of investing in the same scheme.

Option of ‘Direct Plans’ in Mutual Funds was introduced by SEBI in 2013 precisely to address the above issue and bring about more transparency in the dealings of Fund Houses. Direct Plans eliminate the distributor commission from the expense ratios of scheme and increases the returns. These are cheaper, more efficient, and needless to say, more lucrative way of investing in Mutual funds. Savvy investors and corporates latched on to the idea and almost 41 percent of industry assets now go in Direct Plans. However, irony is that only 12 percent individuals invest in Direct Plans. Reason for this abysmal level of participation by individuals is not difficult to fathom. There is absolute amount of silence in the industry across participants when it comes to Direct Plans. Neither the fund houses nor your distributor/banker will ever speak about it. Even so-called unbiased mutual fund websites and portals in the country don’t publish Direct Plan performances openly unless one specifically digs it out with his own research. The concept of direct plans has been nicely kept under wraps by all concerned parties. More awareness and informative education about this concept will immensely benefit the end-investor in many ways and help deepening the Mutual fund industry in a more transparent way.

Enhance Client Returns

More money with same effort is never bad. Direct Plans are a definitive way for clients to save on in-built expenses and earn more out of their hard-earned monies. For instance, a three year CAGR return difference of 1.07 percent on an equity fund means an extra return of Rs.43,340 on a 10 lakh investment value. Data amply proves it for all categories of funds that there is a significant difference in the expense ratios between regular and direct plans, leading to a growing difference in annualised returns.

For a marginal investor who was on borderline and assessing the risk-return feasibility of mutual funds, Direct Plans will lend more credibility and push him towards participating

Foster Genuine Advisory

When advisors know they can’t earn money from the product providers and have to charge clients for their advisory, it will force them to raise the bar of advisory. To be able to win client trust and confidence and be able to charge them, advisors will have to expand their horizon of services and sharpen their bouquet of advice. Genuine advisory and client centric approach will thrive and in turn benefit investors. If there is no incentive to advise scheme A against scheme B, or to get investor in Equity vis à vis debt, then the advice truly becomes unbiased and the only way out for advisors is to think about long-term interests of the clients.

Encourage Competition & Improve Service Standards

Unequivocally, Direct Plans will mean that clients will receive improved services and focussed attention.Investors will pay for true value-add and stick to institutions/advisors that can provide sophisticated advice and superior service. This will usher a healthy competition in advisor fraternity and help raise the overall standard of research and advisory in the industry.

Lend Credibility & Increased Participation

When the investor knows that he is investing in a commission-free product which was designed by regulators to give the best deal to clients, his trust on the system will increase manifolds. One of the key reasons why fixed deposits are the largest receivers of financial savings is because they are trust-worthy and transparent. Direct Plans offer higher returns than regular plans. Conversely, they also give lesser negative returns than regular plans in market downtrends. Needless to say, for the marginal investor who was on borderline and assessing the risk-return feasibility of mutual funds, this will lend more credibility and push him towards participating.

Conclusion

Mutual fund industry, despite its advantages, has barely 17 million investors in a country of 1.25 billion. The industry desperately needs enhanced focus on transparency and increased communication to broaden participation. If powerful concepts like Direct Plans are kept away from investors in a conspicuous manner, it will do more harm to the industry in the long-run. Majority of the investors need help from experts and won’t mind paying for good advice. Product providers and market participants should openly promote and educate clients on this powerful concept and let the investor decide if he would prefer paying for the advice or go with the status quo.