Mutual funds have two schemes for their plans – Direct and regular plans. Some key differences will help you to choose between the plans that are right for you.
Even though both the plans have their respective benefits, you need to understand what works best for you in terms of investing in different plans and their returns over time.
However, both these types of funds are managed by the same mutual fund manager. The major difference between them is that in a regular plan, a commission fee is paid to the fund house as a distribution fee, and there are no such fees in a direct plan.
Before we try to understand both these types of concepts, we need to understand the concept of Total Expense Ratio (TER).
Understanding Total Expense Ratio
A TER, also known as the total expense ratio, is a recurring operating expense incurred by the mutual fund company.
It is charged proportionally against the assets and then adjusted in the NAV of the unit. TER includes management fees, registrar’s fees, trustee fees, marketing costs, and distribution costs.
Distribution cost is the commission paid to the mutual fund distributors/ financial advisors for the intermediaries. These intermediaries play an important role between the asset management company (AMC) and the investor. TER is one of the critical criteria to compare a direct plan vs a regular plan.
Understanding a Direct Mutual Fund Plan
Direct plans in Mutual funds were introduced in 2012 by SEBI.
It majorly helped investors to buy funds without any intermediary. These plans can be directly bought online by investors.
These plans charge very less TERs as there are no intermediaries involved.
Since you can directly invest in direct mutual funds, there is no mutual fund distributor involved in the process and it saves the distribution expenses (distributor’s commissions) by the asset management company.
Therefore, the TERs are also lower. This makes a direct mutual fund plan a really feasible and convenient plan for most investors.
Regular Mutual Fund Plan
Regular plans are bought through mutual funds distributors and are managed by asset management companies.
These plans provide a lot of value-added services like advising investors on which mutual scheme to invest in, submitting investors’ relevant documents to the Registrars and Transfer Agents (RTA)/ Asset Management Companies (AMC), and helping investors with the investment process.
Therefore there is a distributor cost that the investor needs to pay for these services. These distributor costs are added to the TER of regular plans. This is why the TERs of the regular plans are higher in terms of cost.
Differences between Direct and Regular Plans
- NAV (Net Asset Value): The TER will directly affect the NAV of that mutual fund. Therefore the NAVs of direct plans are higher than that of regular plans. To be precise, the investment value after you have made your purchase will always be higher in a direct plan rather than in a regular pan.
- Returns: The TER difference between the plans of mutual funds also varies depending on the commission structure of AMCs. This difference will be between 0.5% to 1% for the TER between the two plans. This also has a direct effect on the returns of the plans. Over a long investment period, this percentage can be built up to a substantial amount in returns on your investment.
- Role of financial advisor: Working with a regular plan will give you the help of a financial advisor in mutual fund transactions whereas no such support is present in direct mutual funds plans. It is very easier nowadays to buy direct plans but apart from that services such as whether to invest in equity, debt, or hybrid funds, which scheme to invest in, when to sell, etc can require a lot of knowledge that is not provided in direct plans. The financial advisor does the risk profiling of the client which helps in selecting and building the right mutual fund portfolio.
Which is better – Direct or Regular Mutual Funds?
Both schemes of direct vs regular mutual funds have their advantages over the other. Let us go through both the options on whether to invest in regular mutual funds or direct mutual funds.
Investing involves clarity on the financial needs, expectations, and risks involved. Then after doing the research you need to find what criteria fit the best for you. An intermediary will help you to make the right decisions to choose the ideal choice for your portfolio. Therefore if you are choosing a direct plan, you should have all the necessary details to choose a mutual fund that suits you.
The in-depth knowledge of the intermediary/ financial advisor will provide you with a huge array of mutual funds to choose from. They’ll guide the investors to get the right plan for them to earn higher returns.
Regular portfolio monitoring and review
Markets are always evolving. A regular investor needs to be updated with the current market trends.
In a regular plan, intermediaries keep the track of the market and take the time out for reconstructing whenever needed. Whereas for a direct plan, the portfolio monitoring and reviewing from time to time needs to be done by the investor himself.
In a regular plan, you get a few additional value-added services as well for convenience.
For example, keeping a record of an investor’s investments, providing tax proofs during tax filing, and facilitating redemptions are provided in regular plans.
These services are provided by the Intermediaries in regular plans.
Who should invest in direct plans of mutual fund schemes?
Investors who wish to directly invest in mutual funds rather than paying the extra fees to intermediaries can invest in direct mutual fund plans.
However, before you invest, you should have in-depth knowledge before investing in direct plans. Someone comfortable getting involved in the entire process of application, documentation, tracking, portfolio reviewing, etc. should invest in direct plans of mutual funds schemes.
Therefore, to invest in direct mutual funds, an investor can increase returns by reducing the expense ratio.
In conclusion, both the plans, direct or regular are good in their areas according to the expertise of the investor.
If you are a beginner and need help with the analysis of the market and mutual funds, then you might consider investing in regular plans.
Whereas if you have the time and knowledge to monitor your funds and choose the right ones, then you can choose to invest in direct plans. It depends on the knowledge and the time an investor is willing to put in for his/her investments.
You can sign up on MoneyIsle to start investing in regular mutual funds today.