One of the reasons that people find themselves hesitant to invest is the numerous options that are available to them, especially when investing in mutual funds. There is one choice that especially has a great impact on the returns you see is the decision of choosing between a direct vs regular mutual funds plan so let’s break down what they mean.
In 2013, the Securities and Exchange Board of India (SEBI) made it mandatory for Asset Management Companies (AMCs) to provide customers with the option to invest directly in the fund without a middle man, like an agent or distributor. The result of that is a direct plan.
The difference between regular and direct mutual funds is that a direct plan is when you invest directly in the mutual fund company, generally online, whereas a regular plan is when you buy the plan/invest through a third person, namely an advisor, broker or distributor (an intermediary, basically).
As an investor, there are different financial implications for you when investing in a direct plan vs regular plan. The biggest one is that, when you invest in a regular plan, the mutual fund company pays a commission to the intermediary, and this cost is then recovered from your plan with the company. This means that the expense ratio for direct and regular plans (amount or percentage used by the mutual fund company to cover costs like administration, advertising, management, etc.) is different; the expense ratio is higher with a regular plan that it is with a direct one. As a result of this, there is also a Net Asset Value or NAV difference between direct and regular plans (NAV for a direct plan is higher since there is a lower expense ratio).
The returns that you make, as such, are higher with a direct plan than with a regular one by approximately 0.5% when it comes to equity mutual funds and 0.2% when it comes to debt mutual funds. This may seem like a small percentage but, if you account for what you could do with it and compound interest that can be applied to it, it adds up to a lot.
There are, however, some advantages to regular plans, especially for new investors. It’s hard to navigate the market when you first start investing and, to that end, when you invest in a regular plan, you have someone giving you investment advice as well as doing market research for you. This makes it by far more convenient since direct plans require you to spend a fair amount of time and energy researching to make the right investment decisions.
Since mutual funds are market-linked, this kind of advice can make a huge difference in your return on investment. Even choosing the right mutual fund is crucial since choosing the wrong one can lead to up to 5% lesser returns over time. With a regular plan, you also get services like periodic reviews of your investment so your advisor can help you recalibrate and achieve even higher returns. These recalibrations can, over time, increase your returns by as much 1.5%. Advisors also help you track your investments and changes in your accounts and investments, which can be a great help since neglecting these tasks not only can lower returns but lead to loss of money.
A direct plan, in comparison, may seem trickier to navigate but many would say that the higher returns are worth it. Though this may have been the case when such a plan was first introduced, you no longer need to be an expert to go with a direct investment plan. These days, there are numerous platforms and websites available that offer you the tools and the information to compare between companies, plans and the nitty-gritty of how to invest in direct mutual funds. Reviewing your portfolio is definitely important but remember, you can even do this with an independent advisor, should you feel the need, rather than investing in a regular plan. Remember that, since the intermediary in a regular plan is being paid a commission, their advice may not always align with your own financial/investment goals.
So what should you choose between direct vs regular mutual funds?
That depends entirely on you. There are, as we mentioned, pros and cons to both but it is ultimately your decision to make that you know them. Make the choice that best suits your long term financial plans once you assess your own financial know-how. Regardless of your decision, ensure that you are doing your research at all times!