Direct vs Regular Mutual Funds, what to choose, this query has not only been haunting many entry level investors but experienced investors as well. Let’s find this out by understanding and evaluating key differences between direct vs regular mutual fund plans.
Before we start dissecting the topic, let us first understand why direct and regular mutual funds exist!
Increased financial literacy and better access to online investment tools have prompted many private investors to take control of their investments.
Additionally, the rise of investment portals on internet as well as improvement in financial technology has enabled investors to make any transactions without requiring human involvement of intermediaries or third parties.
Keeping this in mind, SEBI regularly comes up with plans that are well aligned with technological advancements and direct mutual fund plan is one of them. But whether direct mutual fund plan is better than regular mutual fund plan? Let’s first try to understand the definition of direct mutual fund plan.[lwptoc]
What is a Direct Mutual fund?
SEBI approved Direct Mutual Funds in 2012. The definition of direct mutual fund plan is simple. As the name suggests, direct plans can be purchased directly from the Asset Management Companies (AMC), without the need of intermediaries like Mutual fund distributors, brokers etc. An investor can invest in direct mutual fund plans online or directly through AMCs.
Investors can also invest in direct mutual fund plans through SEBI-registered financial advisors but you will be required to pay a fee for their consulting services. As mutual fund distributors do not participate in direct mutual fund plans, AMCs do not need to pay any distribution margin or commission to them.
Due to this, while comparing direct mutual funds with regular mutual funds, the expense ratio of direct mutual funds are relatively lower.
What is a Regular Mutual Fund?
Regular mutual funds are those funds that are purchased through an investment broker, mutual fund distributor, or even a financial advisor. In case of regular mutual fund plans, AMCs compensate such intermediaries for adding new investors to their mutual fund schemes.
As a consequence, regular mutual fund plans attract a small cost in the form of commission as compared to the direct mutual fund plans and the fund houses will include this commission in the expense ratio of regular mutual fund schemes.
An investor might think that direct funds look like a smarter investment choice due to the lower expense ratio but the additional commission in regular plans basically represents the consulting services provided by these intermediaries, which is a fair deal.
In addition to this, investors need to understand that expense ratio is not the only factor which decides the returns from a mutual fund scheme. Choosing a low-cost direct mutual fund scheme may not necessarily benefit the investor.
An investor who has little knowledge about financial market needs assistance in exploring, evaluating and picking relevant mutual fund schemes that can help to reach financial objectives and this is where regular mutual fund plans come to rescue the investor!
What are the advantages of Direct Plan Vs Regular Mutual funds?
If we compare direct vs regular mutual funds, direct plans offer below benefits:
Lower Expense Ratio:
Whenever individual investors invest in mutual funds, they basically pay certain fees to fund managers of asset management companies for their investment services. The money charged by fund managers of AMCs for their mutual fund investment services is called the expense ratio.
Expense ratio for both regular and direct mutual fund plans is calculated by including various parameters such as fund maintenance charges, fund management fees, entry and exit load etc. In addition to all these parameters, expense ratio also includes broker fees or mutual fund distributor’s commission in case of regular mutual funds.
According to Mirae Asset MF, The difference in expense ratio of direct and regular mutual fund plans ranges from 0.5 to 1%, while in few cases it may be more than 1%. Hence due to this additional fees or commission added in regular mutual fund plans, direct mutual funds have comparatively lower expense ratio. This is one of the key differences between direct and regular mutual fund plans.
Relatively higher NAV:
The Net Asset Value (NAV) indicates the market price of a fund on a per-unit basis. NAV calculations are simple. NAV of a mutual fund can be computed by dividing total market price of all mutual fund units by the number of mutual fund units available in the market.
In case of direct mutual funds, the NAV value is little higher as compared to regular plans due to the commission paid by the AMCs to intermediaries.
As direct mutual fund plans have relatively lower expense ratio, they offer little higher NAV than regular mutual fund plans.
Marginally better Returns:
Direct mutual fund plans offer marginally better returns as the expense ratio is lower in contrast to regular mutual fund plans. As no compensation is paid to intermediaries like investment brokers or mutual fund distributors, direct plans offer relatively better returns in long term.
What are the advantages of Regular Plan vs Direct plan in Mutual Funds?
Advantages of regular mutual fund plans over direct plans are numerous. When we compare regular vs direct mutual funds, regular mutual fund plan offers below benefits:
Ease of investment:
Mutual fund investments are not as straightforward as it appears. Before making any mutual fund investment decision, it is always required to clearly set financial goals as well as to evaluate the risk appetite of an investor.
After completing this evaluation and setting short as well as long term investment goals, an investor needs to precisely choose mutual fund schemes from thousands of mutual fund schemes available in the financial market.
Evaluating financial goals and picking suitable mutual funds is a tedious and time consuming process. An investor can skip this complicated process by investing in regular mutual fund plans.
In this case, a mutual fund distributor is well aware about the best mutual fund schemes to meet a specific financial goals due to years of experience.
Mutual fund distributor can assist an investor in determining the ideal combination or blend of mutual fund schemes for investors based on the investor’s financial objectives and investment appetite.
On the contrary, the direct plan is completely deficient in this area as it is a do-it-yourself plan. This is the main difference between regular and direct mutual fund plans.
Entities like mutual fund distributors or brokers are well-versed about the vast diversity of mutual fund schemes available in the market.
With years of knowledge in managing mutual fund portfolios, an experienced mutual fund distributor can assist investors to achieve higher returns for their respective financial goals like education planning, child marriage planning, retirement planning etc.
Therefore, an investor can only get expert guidance through regular mutual fund plans. In a direct mutual fund plan, the investor always depends on his or her own understanding of financial market.
Choosing the best mutual fund scheme and making investment decision is not enough to generate higher returns as financial markets are fast-moving and constantly changing with every passing second.
After making an investment in mutual funds, investors need to regularly review and optimize their mutual fund portfolio but it is little difficult for individual investors to monitor the market on a consistent basis.
In a regular mutual fund scheme, mutual fund distributors constantly examine the market as well as analyze the investor’s portfolios on a regular basis.
Additionally, they carry out mutual fund optimization activities like switch-in and switch-outs between debt funds and equity market as and when required. On the other hand, investors who choose a direct mutual fund plan need to invest their own time and put enormous efforts to review their portfolios on a regular basis.
In mutual fund investment, one size does not fit all! Every investor has different portfolio requirements. To cater these requirements, intermediaries like mutual fund distributors also provide a number of customized services for value addition.
For example, maintaining a track record of portfolio investment is important for one investor while keeping proper tax documentation for tax filing is important for other while some investors also look for experts who can help them in facilitating redemption process and so on.
None of these services are included in direct mutual fund plans. So this is again another difference between direct and regular mutual funds as regular plans include all of these customized features.
Are Regular plans better than direct plans?
Many investors initially feel that direct plan is better than regular plan just on the basis of two parameters which is lower expense ratio and higher NAV.
There are many common myths about mutual fund investments and one of them is that direct and regular mutual funds are separate funds. However, if you particularly think about a mutual fund scheme, both direct mutual fund and regular mutual fund are two variants of the same mutual fund scheme.
The scheme is managed by the same Asset Management Company and invests in the same asset classes such as equities, bonds, gold investments as well as the other asset classes.
The primary distinction between these two mutual fund scheme variants is that the AMCs pay some commission to the distributors, whilst no commission is paid in direct mutual funds as there is no intermediary present in direct plans.
This is because when you invest directly, there is no intermediary and hence no related costs. Direct plans have a lower expense ratio precisely because of this reason.
But if you carefully consider the overall value addition, expert guidance and the level of ease of investment offered by regular plans, you will definitely feel that it is always worth to take the regular plan route for mutual fund investment.
Many investors are not aware that even financial advisors charge a fee for providing advisory services for direct mutual fund plans and sometimes the money they charge is way more than the commission you pay to the mutual fund distributors. So, regular plan eventually wins the race when you consider lower expense ratio for direct plan.
Other parameter which we discussed is higher NAV! But does higher NAV the only element which decides the performance of a mutual fund or does higher NAV guarantee better returns? The answer is NO! NAV matters but it is not the only factor which an investor should consider while investing in mutual fund scheme.
There are number of other factors which affect mutual fund performance in long run such as size of the fund, economic changes etc. So, higher NAV does not necessarily guarantee better returns and choosing a mutual fund scheme purely on the basis of NAV is one of the biggest mistakes while investing in mutual funds.
Who should invest in regular plans of mutual fund schemes?
Individual investors who do not wish to put time and efforts in activities like investment planning, portfolio management, investment optimization should choose regular mutual fund plans over direct plans.
Additionally investors who have little knowledge about financial market and wish to skip steps like screening and shortlisting suitable funds from thousands of fund available in market can opt for regular mutual fund plans. This is the reason why regular mutual funds are better than direct mutual funds.
There is no difference in the portfolio composition and investment strategy of both. The difference in returns is purely due to the commission paid to the middleman.
We tried to compare regular and direct mutual fund plans through this post. We tried to investigate how these plans function, what are the pros and cons of both plans etc.
Although direct plans are relatively less expensive and provide comparatively better rate of returns, it requires adequate knowledge of financial market and concrete experience in investing while opting for direct mutual fund plans.
If an investor has less understanding about mutual fund investments and wants to get expert guidance, regular mutual fund plans are best fit as one wrong investment decision can jeopardize you entire portfolio.
In our day to day life, we frequently need to connect with the experts! For example, you take help from a carpenter in case you observe that the door hinges are not properly aligned with the door frame. You call a plumber to fix a leaking tap in your bathroom. You go to a Salon for a haircut. Even if you know how to fix the door or leaking tap or do a haircut, you always see an expert!
If you have a business, you consult lawyers, accountants and bankers because getting advice from these professionals is the best way to be sure that you are going in the right direction. Even if you know that you have some knowledge in these areas, you are confident that consulting an expert will deliver the best results.
Then why to choose a direct plan over regular plan if you know that an expert with years of experience can help you to make the best out of your investment plans?
There are hundreds of mutual fund plans categorized on the basis of asset class, investment type, market capitalization, sector focus etc. Each fund has a set of specific objectives so that it can serve a specific purpose of investment as well as beat inflation in long run. It requires expertise and thorough research to choose the right fund that can help you in reaching your financial goals.
Both direct and regular mutual fund plans have identical portfolio structure and investment strategies. The only difference between direct and regular mutual funds is the distribution commission which is worth to pay.
Investors should consider pros and cons of direct mutual fund plan and understand how direct plan works in terms of the cost structure and convenience. Investors should also investigate as to how it affects their overall returns and then only make the investment decision.
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