Mutual Fund Unlocked: The dark side of direct plans of mutual funds

SEBI has been in favour of direct plans mutual funds and in the recent AMFI conference, SEBI chairman Ajay Tyagi has asked AMFI to equally promote direct plans of mutual funds. This is with an intention to reduce the chances of mis-selling, as direct plans have lower transaction costs and more transparency. But before promoting the direct plans, SEBI should address some of the loopholes which may defeat some of the benefits that the direct plans have.
 
The actual intention behind the direct plan was to offer knowledgeable investors a low-cost product. Distribution and advisory costs are not the constituents of direct plans, which on the other hand these are the constituents of a regular plan. Due to this, the regular plans are expensive compared to direct ones.
 
There are many RIAs (Registered Investment Advisors) and also some online platforms and mobile apps, who are promoting direct plans by forecasting the possible return that an investor may earn by choosing a direct plan over the regular plan. This is a violation of the principle that returns cannot be projected but can only be assumed. So here SEBI needs to address the advertising code for direct plans.
 
In a recent advertisement, one of the online platform or mobile app used a pitch line that investors can earn Rs. 25 lakh in 25 years by opting to direct plan and here the difference between the returns of the direct plan and a regular plan is assumed as 1.5 per cent. However, less than 5 per cent of the mutual fund schemes have 1.5 per cent of difference in returns between these plans. This is actually a pure misrepresentation of direct plans.
 
So it is vital that you take a prudent decision after looking at the pros and cons of any investment product offerings and choose the product which would suit you. Only opt for direct plans if you have adequate knowledge about investments or else it would be a good idea to either invest with the advice of RIA or a mutual fund distributor.