One of the commonly asked question around mutual fund is what is the difference between direct and regular mutual fund? And more importantly which one is better? So let’s understand each type of mutual funds and how different they are from each other.
Regular plans are the ones where the mutual fund company pays commissions to intermediaries for your purchase. With a Direct plan, there’s no need for intermediaries, so you know that your purchase is going into things like fees and expenses instead of commission. Regular plans are more expensive since there’s a fee of commission on top!
What Is Direct Mutual Fund?
Direct Mutual Funds are mutual funds with no involvement of third party agents. Accordingly, there are no commissions and the expense ratio is lower. The return is higher due to a lower expense ratio. In order for it to be considered a Direct Mutual Fund, the word ‘Direct’ should be prefixed in the name of the fund. These funds can be bought through either online or offline mode.
What Is Regular Mutual Fund?
The expense ratio for regular mutual funds is higher than direct mutual funds. This makes them more suitable for people who don’t have time to monitor their portfolio or investment knowledge. The advisor at a regular plan office will give advice and help with monitoring investments at a nominal fee
What Is The Difference Between Direct And Regular Mutual Fund?
Now as we know what is direct mutual fund and what is regular mutual fund, it’s time to understand what is the difference between Direct And Regular Mutual Fund. In 2012, the Security Exchange Board of India introduced direct plans for mutual funds. These plans are available as alternatives to regular plans, and have no intermediaries in between. The difference between direct and regular mutual fund include when in direct plans there is no distribution fee or commission taken by the fund house.
Lower expense ratio of direct Mutual Funds
The ratio of expenses to the total assets is known as the expense ratio. Expenses entail advertising, portfolio management, commissions and administration expenses to cover agents or distributors. Direct plans cost less because the company doesn’t pay commission to the people offering them.
Higher returns from direct mutual funds
Direct plans result in higher returns because they have lower portfolio expense ratios. When you invest in a direct plan, the savings that would be typically spent on distribution expenses are free to continue to generate returns through compound interest rather than going towards paying off said expenses. This difference between direct and regular mutual fund’s earnings is usually marginal in the initial years, but it becomes substantial over time.
Higher Net Asset Value (NAV) of direct plans
NAV of direct plans are higher because they have a higher return. Higher operating expenses on net AUM subsidizes lower expense ratios which can result in an even higher NAV. The difference in NAV widens when and if the compounding power is leveraged by the direct plan.
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Which is Better Direct or Regular Mutual Fund?
Since we have covered what is the difference between Direct And Regular Mutual Fund by now, let’s look at which one is better. Direct and regular funds are just two different types of the same mutual fund. Both plans invest in the same stocks and bonds, with the only difference is that for regular funds transaction fees or distribution expense is paid and for direct funds it is not. Direct plans have a lower expense ratio because there is no middleman and all costs are eliminated.
Most investors consider higher entrance prices for the Direct plan to be advantageous, but this is not always true. The higher initial expense may cost more in the long run and incur greater investment costs. Investments should be done rather than relying on an advisor, especially if they don’t understand how to invest properly.
Investments in regular funds would likely be higher, but the overall returns on the portfolio would still be higher because of the advisor’s constant monitoring and rebalancing.
Read More: Equity Mutual Funds – Types, Benefits, Taxation
Who should invest in direct plans of mutual fund funds?
By now it’s pretty much clear that what is the difference between direct and regular mutual fund. This will help you in deciding whether you should invest in direct or regular mutual fund. If you want to invest in a fund directly as an individual investor, you should consider investing through direct funds. Investing in mutual funds as an individual investor is a fairly involved process. As the investor, you must take care of all of the application, documentation, tracking, review and compliance issues associated with the investment.
Investors want to find funds that have low expense ratios so they can get more returns on their investment and know a lot about mutual funds. If you are interested in increasing your returns, then you should invest in a direct fund that doesn’t charge much for the management.
Where to purchase direct plans from?
After understanding what is the difference between direct and regular mutual fund, If you want to invest in direct mutual funds, you need a direct plan. You can buy these plans from a retail broker or the sponsoring MF house. The problem is that this process is generally slow and tedious, requiring multiple passwords and IDs.
Conclusion
As it is understood what is the difference between direct and regular mutual fund what is Choose a direct plan if you’re knowledgeable about investing and want to be proactive with how your money is invested. You won’t get as much support from the fund provider, but you’ll make more money over the long-term.
You may find it unnerving to control your mutual fund investments now, but starting investing is always worthwhile. You should go with a regular plan, with the understanding that you will improve your knowledge and confidence over time. Keep only to your investment plan, though, and don’t let anyone from a distributor persuade you away from that course of action – they have their own interests at stake as well.
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