When does investing in mutual funds through a direct plan make sense?
Starting January 2013, fund houses will start rolling out direct plans for various schemes, which will offer separate net asset values (NAV). The yield could be 0.5 to 1.25 per cent higher (in case of direct plans). However, investing through this plan makes sense only if the person stays invested for a longer tenure. Reason: The difference in cost may seem negligible in isolation, but the difference of 50 basis points (assumption) can show its impact in the long term.
For instance, you invest Rs 1 lakh in an equity fund through a direct plan and the regular plan. If the former generates an annualised return of 15 per cent and the later generates 14.5 per cent, the difference in returns will widen with the increasing number of years. Difference in returns over 10 years will be Rs 17,000, over 15 years it will be Rs 51,000 and 20 years, it will be Rs 1.37 lakh.
What are the things to keep in mind while investing through direct plans?