Fund: New investors often remain unaware of the clear distinction between direct and regular plans of a mutual fund scheme. However, before investing in any mutual fund scheme, investors should understand the difference between direct and regular plans to make a beer choice. This article explains the differences between the two.
Direct Plan allows an individual to invest directly with the Mutual Fund Asset Management Company (AMC), bypassing any involvement of distributors or agents. Here, individual investors enjoy complete autonomy in choosing their mutual fund schemes.
Some of the advantages of investing in direct plans of mutual funds are the following:
- The direct plan has a lower expense ratio compared to regular plans, as it eliminates agent/broker fees.
- Investors don’t have to pay any commission fees or distribution charges, which results in a lower expense ratio.
- Lower expense ratios result in higher returns from direct plans than the regular version of the same fund.
- The Net Asset Value (NAV) of a direct plan is also generally higher than the regular version of the same fund.
- By investing in direct mutual funds, investors can eliminate the chances of being misled by fake advisors.
Regular Plan involves the active participation of agents or brokers or distributors or bankers or advisors. In a regular plan, investors invest through these intermediaries, who are paid a fee by the AMC. The following are some of the features of a regular plan that you should know.
- The involvement of intermediaries in regular plans comes at a cost and from your own pocket.
- Such a fee is charged to the plan and deducted from your investment. Generally, the distribution fee is part of the expense ratio of the fund, which means the higher the commission, the higher will be expense ratio, and the lower the returns.
- The variation in the expense ratio of a direct and regular plan could be in the range of 0.8% to 1.6% or even higher. This is also one of the reasons why returns from regular plans are generally lower than the direct plans of mutual fund schemes.
According to Dr Pradiptarathi Panda, a Full-time Assistant Professor at the National Institute of Securities Markets, historical data clearly demonstrates that direct mutual funds have provided better returns than regular plans.
Due to higher returns and lower expense ratios, many investors these days are getting inclined towards direct plans. Although direct plans are cheaper, investors may sometimes find it difficult to find the right direct plan to start their mutual fund investment journey. Also in the current scenario, most retail investors lack expertise in selecting suitable mutual fund schemes. In such a situation, it would be advisable for them to opt for regular plans managed by qualified and experienced professionals like Sebi-registered investment advisors.