Investing in Mutual Fund Schemes avail investors with two plan types of options, the first one, the DIRECT PLAN in MUTUAL FUND and the second one the REGULAR PLAN in MUTUAL FUND!
Every mutual fund scheme offers these two kind of plans and there is a key difference between direct plans and regular plans. Both the plans have their benefits and their kind of charges associated.
Investors often misunderstood that a regular plan in mutual funds charges more than the direct plan in mutual funds. However, it is advised to investors, before you conclude, to understand how these two plans work in terms of the cost structure, how it affects their returns, and make informed decisions regarding whether to invest in Direct or Regular mutual fund plans.
Let us know first what is a direct plan and regular plan in mutual funds!
Direct Mutual Fund Plan!
Direct plans are bought from the AMC and no intermediary is involved. You can invest in direct plans online by going to the AMC website or by visiting the AMC or the registrar’s office in your city. You can also invest in direct plans through SEBI Registered Investment Advisors (RIAs); RIAs, however, charge a fee to their clients for their advisory services.
Since mutual fund distributors are not involved in direct plan investments, the asset management company does not have to incur distribution expenses (distributor’s commissions). As a result, if you compare regular vs direct mutual funds, you will find TERs of direct plans are lower.
Regular Mutual Fund Plan!
Regular plans are bought through mutual fund distributors. Mutual fund distributor provides services like advising investors on which mutual scheme to invest in, submitting investor’s Know Your Client (KYC) documents to the Registrars and Transfer Agents (RTAs) or AMCs, helping investors with the investment process (e.g., submitting application forms, cheques, etc to the RTAs/AMCs), ongoing services (e.g., generating account statements, redemption requests, etc).
For these services, the distributors receive commissions from the AMC as long as you remain invested in the regular mutual fund plans. The AMC adds these commissions to the TER of regular plans. As a result, the terms of regular plans are higher than those of direct plans.
Direct Plan vs Regular Plan!
Following are the key difference between direct and regular mutual funds -
Net Asset Value (NAV): The TER of any mutual fund plan is adjusted from the NAV. Since TERs of regular plans are higher than those of direct plans, the NAVs of direct plans are higher than the regular plans. In other words, your investment value after you have made your purchase will always be higher in a direct plan compared to a regular plan.
Returns: The difference of TER between regular and direct plans varies from scheme to scheme and AMC to AMC, depending on the commission structure of AMCs. For example, commissions of equity funds are usually higher than some types of debt funds. The difference in TERs between regular and direct plans can range from 0.5% to 1%. This directly affects the returns of regular and direct plans.
If the TER of a regular plan is 0.75% more than that of the direct plan, then the direct plan will give a 1% higher CAGR return than the regular plan.
Role of financial advisor: Direct plans are for DIY investors or experienced investors since they do not need the help of financial advisors in mutual fund transactions. They easily carry out their investment through online platforms of the AMCs / RTAs and transactions through mobile apps.
However, instead of this it is advised to all investors whether novice or experienced to invest in regular plans of mutual funds. This is because apart from assisting with transactions, financial advisors help investors make investment decisions (e.g., whether to invest in equity, debt, or hybrid funds, which scheme to invest in, when to sell, etc), monitor investment portfolio, etc.
This is right that Direct plans have lesser costs than regular plans. But at the same time if you invest for the long term these costs can be substantial. However, you need to have some investment experience and knowledge to invest in direct mutual fund plans.
Thus, it is recommended to be smart with your choice and plan to invest in Regular Plans of mutual funds under the guidance of experts. This will resist you from taking any wrong investment decisions and will help you create wealth!!
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For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).