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Mutual Funds investments are available in two plans – Direct or with Mutual Fund Agent. The Regular Mutual Fund investments have been common with the investors, Direct Mutual Fund investments were introduced by the Securities and Exchange Board of India (SEBI) a few years back. So you may have questions about it. What is the difference between a Direct Mutual Fund plan and a Regular Mutual Fund plan? Which is better? What if I am investing via SIP mode?
Direct Mutual Fund Plan
What are Direct Mutual Funds: WealthBucket
The SEBI introduced Direct Mutual Fund Plans in January 2013. Due to which an investor has the option to buy directly from an Asset Management Company (AMC). For this kind of Mutual Funds Investment, the Insurance Broker or Agent is not involved. It is necessary for the AMC to provide you with this option, under the regulations of the SEBI.
Under this variant, you pay directly to the Fund House. This makes your investments free from commission or distribution fees, bringing down the Expense Ratio. No Transaction Charges are levied. You may invest via the SIP or Lump Sum route.
Direct Plans have a different, Higher Net Asset Value (NAV). The Prospectus of such plans specifies “Direct” as identification. But the investment objective and diversification of the Mutual Fund Portfolio would be the same for Direct or Regular plans.
Summarily, investing through a Direct Plan variant gets you:
- Lower expense ratio.
- Higher ROI because the amount that would, otherwise, have gone into the coffers of someone else, is invested, re-invested ending up being compounded just like the rest of your investments.
What Is the Difference Between Direct And Regular Plans
Regular and Direct plans are just the two options to buy the same mutual fund scheme. These would be run by the same Fund Managers investing both in the same Portfolio. In regular Plan, your broker gets paid a commission (distribution expense of transaction fee out of your investment, by the Mutual Fund Company or the AMC. On the other hand, in Direct Plan, no such commission is paid to the broker. It is, instead, kept included in your investment payment. This way, not only the expense Ratio gets reduced, your investment & its Returns get increased as well.
| Elements | Direct Mutual Fund | Regular Mutual Fund |
|---|---|---|
| Expense Ratio | Low | High |
| Returns | High | Low |
| Market Research | By Self | by Broker/Agent/Distributor |
| Investment Advice | Not Available | Available |
| Ease of Investment | Less | More |
To understand things better, let’s take an example.
Say, A and B invested in three mutual fund schemes. Choosing to invest in SIP Plans of Aditya Birla Sun Life Liquid Fund, HDFC Equity Fund, and HDFC Balanced Advantage Fund, from April 2014. The monthly SIP amount is Rs. 5,000 per plan. While A chose the options of Regular plans, B chose to invest in the Direct plans.
Value of their investments after 5 years, would be:
| Investor | HDFC Balanced Advantage Fund | HDFC Equity Fund | Aditya Birla Sun Life Liquid Fund |
|---|---|---|---|
| A | Rs. 4,05,544 | Rs. 4,00,335 | Rs. 3,63,967 |
| B | Rs. 4,14,396 | Rs. 4,10,115 | Rs. 3,64,837 |
| Difference | Rs. 8,852 | Rs. 9,780 | Rs. 870 |
Now let’s understand the difference between Direct and Regular Mutual Funds, by comparing their average expense ratio and average returns.
We have taken different Fund categories, giving a broad view, to understand the difference better.
| Fund Category | Equity | Debt | Hybrid |
|---|---|---|---|
| Regular Plan | 2.02% | 0.90% | 1.96% |
| Direct Plan | 1.22% | 0.42% | 0.98% |
| Difference | 0.80% | 0.48% | 0.98% |
**The data provided in above tables is as on 30 Sept, 2018. Do visit the website for updated information.**
With the help of the table above, we can understand that the Annual Returns would incur better by approx 0.5%-1%. By choosing to take a Mutual Fund investment through Direct mode rather than the Regular mode.
How To Know Whether You Are Invested In Regular Plans Or Direct Ones
As mentioned earlier, the contents of the Prospectus would state the word “Direct” very clearly. Besides that, the Account or Fund Holding Statement that your Fund House sends to you, on a regular basis, would mention whether your Mutual Fund plan is Regular or Direct.
Generally, in most cases, when you invest in a Mutual Fund through your bank, it would be for a Regular Plan. Whereas, if you have invested in a Mutual Funds online via the website of a Fund House, the Plan would be Direct.
Furthermore, if your investment broker is telling you that you are getting his services “Free of Cost”, then, most probably, you have invested in a Regular Mutual Fund scheme. And he is charging the hidden fee.
Advantages of Regular Plans over Direct Plans
- Convenience: Though with Direct Plans your Expense Ratio gets lower, however, the efforts from you would increase. To list a few, with Direct Plans, you will need to shortlist funds based on their goals and risk profiles. The select Funds that meet your goals, whether it is creating wealth or Tax Saving. An intermediary, whose job it is to study and evaluate the market, will have a clear understanding of these.
- Guidance from Experts: Studying, comparing and analyzing various Mutual Funds Performance available in India. Then matching it with your financial goals and risk profile requires in-depth knowledge. A person gets eligible to become Mutual Fund Agent or Broker/Distributor only after rigorous studies and clearing the criterion set by the government. qualifying for it. Besides, the certificate has to be re-applied for, every 5 years. Such Mutual Fund Advisors would be able to guide you towards the right investment portfolio. Also, it is their job to get you to invest in the Best Mutual Funds that give great returns.
- Regular monitoring and tracking: Whether you are an employee, businessman or professional, it gets, next to impossible, to review the market, every day, during certain hours. We may have time to review things, once in a while, but scarcely it would be regular. So with Regular Plan, you, kind of, hire someone else, to track and monitor your savings. Who will advise you when its time to re-allocate your assets to earn better returns and receive more benefits in Mutual Funds.
- Value-added services: The brokers also help you facilitate, monitor and track your Mutual Funds. Thereby easing the process of investing in Mutual Funds.
Hence, it is suggested to take assistance and guidance. The additional expense ratio gets justified with better returns due to the proactiveness of your broker.
Conclusion on the Difference between Direct and Regular Mutual Fund
Both, the plans come with their own advantages and disadvantages. With there being, absolutely zero difference between Direct and Regular mutual funds in terms of Mutual Fund Portfolio and investment strategy. The difference that is visible is only because of the commission being paid to the middleman. This may get offset by the benefits of sound advice.
Of course, you may have a different take, especially if you are a veteran player in the market, yourself. So do choose the one that suits your investment profile and start investing.
With thousands of options, and as many parameters to consider and analyze before selecting the Best Mutual Funds Investment. The reputation of the fund house, the age & past performance of the fund, various financial ratios, to name a few. You might find the task of shortlisting and finalizing the fund, a daunting one. Let the market experts at WealthBucket assist you. We do all the homework and, only then, would provide you with the short-listed personalized portfolios.
In case you have already chosen a particular category, we also provide related services. It may be an equity fund investment, Debt mutual fund, Large Cap mutual fund or Multi-Cap mutual fund.
Do call us at +91 9999379929. Or you can mail at contact@wealthbucket.in.
Happy Investing!!
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