Direct vs Regular Mutual Fund Plan: Which One Will Be Best For You?
What is direct & Regular Plan of Mutual fund
When you think of investing in mutual funds, you must have heard about the direct and regular plan, in Jan.2013 SEBI has made it necessary for the mutual fund company to include direct and regular plans in its scheme.
What is Direct & Regular Mutual Fund Plan:
In the direct mutual fund Plan, investors invest at their own discretion without brokers, agents, and advisors. To invest in a direct mutual fund, you will have to do the research on your own and you have to know the advantages and disadvantages of that investment.
Which Mutual Fund will be right for you, what will be your assets allocation, how much will you benefit, you will have to read it yourself before investment.
Regular and direct plans are just two options for the same mutual fund scheme, run by the same fund manager who invests in the same stocks and bonds.
The only difference between the two is that in a regular plan, a commission is paid to a broker by your mutual fund house, which is out of your investment in the form of distribution expenses or transaction fees, whereas in the case of a direct plan, such No commission is paid.
So off course, your return will be higher in direct mutual fund plan. But will the returns only be parameters to invest in direct mutual fund plan
Here we will understand the reasons that one should invest in a direct mutual fund and one should invest in a regular mutual fund plan and what are the advantages and disadvantages of both of them
Advantages of Regular Mutual fund Plan :
The right advice and save time :
There are so many schemes of mutual funds and it will take you a lot of time to find out best fund for investment and it may be that you take the wrong decision, which may lead to loss later.
In a regular mutual fund, you will get the expert guidance offered by your agent or broker would drastically reduce the time and effort needed to invest.
Tracking of Your Investment :
As an individual investor, you may not have the time and resources to track your investment, regularly monitor and review your portfolio returns.
With a Regular plan, the broker or distributor reviews and monitors your returns as well as give time to time advice to you on a reallocation of your investment.
Records of Investment :
Brokers or advisor keeps records of your all investments and provides you whenever you required.
Keep updated on Regulatory changes :
In the present era, there are lots of changes by the regulator in a mutual fund, your advisor tracks these changes and update you accordingly.
Disadvantages of Investment in Regular Mutual fund Plan:
Brokers /Advisor Commission will reduce your return :
The commission deducted from your investment increases the expense ratio of Regular mutual fund plan. This translates to considerably lower returns over the long-term as compared to the same investment made through a Direct plan.
Wrong Advice will impact your capital as wells as your return :
Generally, Brokers and Advisors advise you to invest in the plan of the mutual fund company where he gets more commissions.
For getting more commissions, many times agents give you wrong advice, so that there is a loss in your investment in the future.
Advantages of Direct Mutual fund Plan:
If you can do research before your investment then you should choose a direct mutual fund plan which will give you higher returns.
Lower expenses Ratio in direct mutual fund plan :
In a Direct Plan, the investor directly approaches with the AMC and invest the money by selecting the Direct Plan. In the direct plan no commissions are paid, so NAV will be higher than the regular plan.
Your research gives you confidence in your investment :
When you do research and invest, and when the market falls, you have confidence in that investment because you have researched that investment and you know what the advantage of that investment is and what the chances of it growing in the future.
Direct Mutual fund plan is convenience :
In a direct mutual fund, you buy directly from AMC , so it becomes easy, transparent and prevents of false commitment by an agent.
Return is higher in Direct mutual fund Plan :
When you invest in direct mutual fund plan then expenses ratio is lower and this lower expense ratio will increase your return in the long run.
Disadvantages of Direct Mutual fund Plan:
- There are so many Plans of mutual funds and it will take you a lot of time to find out best fund for investment and it may be that you take the wrong decision, which may lead to loss later.
- As an individual investor, you may not have the time and resources to track your investment, regularly monitor and review your portfolio returns.
- Broker or advisor to add value to you your investment because they are professionals.
- As an individual, you have limited excess of data which leads to wrong investment decision whereas advisor is professional and have access data.
Difference between direct and regular mutual fund Plans
|Point of Difference||Direct Mutual Fund Plan||Regular Mutual Fund Plan|
|Expenses Ratio||Expenses ratio is a low indirect plan||Expenses ratio is high in regular plan|
|Return on Investment||Returns are High in Direct plan||Return is low in regular plan|
|Research of investment||You have to do research before investment||Advisor does research on behalf of you.|
|Investment advice||Not available||Advisor advice whenever you required|
How to identify direct and regular plan :
It is very simple to identify direct or regular mutual fund plan. In direct mutual fund at the end of the plan name “ direct ” is added however in regular plan at the end of plan word “ Regular ” added.
Example of the direct plan: Reliance large-cap fund direct plan
Example of a regular plan: Reliance large-cap fund regular plan
How Direct plan generate return more than regular plan :
Suppose you have started investment of Rs. 10,000/- p.m. in HDFC balanced fund on Jan-2013 in a direct and regular plan.
You have invested the same amount Rs.5.8 Lac in both the fund but your return in the direct plan is more than Rs. 24714 or 1.23%.
|Name of Mutual Fund||Regular or Direct||Actual Investment||Corps||Return (%)|
|HDFC Balanced Fund – Growth||Regular||Rs5,80,000||Rs8,55,105||16.37%|
|HDFC Balanced Fund – Growth||Direct||Rs5,80,000||Rs8,79,819||17.60%|
|(Source: Value Research)|
Expense ratio will make a difference in returns over a period of time.
Example of same plan with a difference in expenses ratio
Reliance large-cap regular plan expense ratio is – 1.86%
Reliance large-cap direct plan expense ratio is – 1.07%
(Source: Value Research)
Direct Mutual Fund will always generate more returns for you, but you should take care that you do not make any wrong investment in the expectation of getting more returns otherwise at the end of you will regret wrong investment decision.
If you are aware of the market and you can take your investment decision yourself then you should invest in a direct mutual fund plan as it will generate more returns for you.
If you do not know about the market and you can’t track your investment, then you should invest only in a regular mutual fund plan.
Hope this will clear about direct and regular mutual fund plan.
Thanks for reading ….
Disclaimer: This article only for education purpose. Please take your financial advisor advice before investing.