Mutual Funds are an investment vehicle that collects money from multiple investors and invests in various types of securities such as stock, bonds, debentures and money market instruments. Investors investing in a mutual fund scheme receive units which can be redeemed as and when required.
You can invest in a mutual fund scheme in two ways: one is to directly invest through an AMC or through an intermediary (regular plan). Here, we will delve deeper into direct vs regular mutual funds, key differences, benefits and much more. Read along to get further insights about the same.
What is a Direct Mutual Fund?
A Direct mutual fund is a type of scheme in which you are directly investing through an AMC (Asset Management Company) that manages the mutual fund. As you are purchasing the plan directly from the fund houses there are no brokers involved with it; hence, no commission is required to be paid.
As a result, you can gain higher returns from direct mutual funds as they carry lower expense ratios due to no commissions being associated with these funds.
What is a Regular Mutual Fund?
A regular mutual fund is a type of plan which involves an investment with the help of an intermediary which can be a broker or a mutual fund distributor. The intermediary must have an ARN (AMFI Registration Number) which authorises them to deal with mutual funds.
These intermediaries play a crucial role in spreading financial literacy among investors and helping them understand every aspect of a mutual fund scheme. Regular mutual funds attract higher expense ratios, a proportion of which is paid to the distributor or broker in the form of a trail commission.
Difference between Direct and Regular Mutual Fund
Here are some of the key differences between a direct and a regular mutual fund scheme:
- Intermediary:
In a direct mutual fund, there are no intermediaries present between the fund house and the investor. In it, you are directly dealing with the AMC. On the other hand,in a regular plan, there is an intermediary in-between the AMC and the investor. It can be a broker, a mutual fund distributor or a relationship manager of a bank.
- Expense Ratio:
The expense ratio of a regular plan is always higher compared to the direct plan of the same fund. This is because the fund house also has to pay commissions to its intermediaries.
- NAV (Net Asset Value):
The net asset value (NAV) of a mutual fund is directly affected by the total expense ratio (TER) of the scheme.Regular planshave a higher total expense ratio when compared to direct plans. As a result, the NAV (Net Asset Value) of a regular fund is lower as compared to a direct plan.
- Convenience:
Direct mutual fund plans are considered more convenient compared to regular mutual funds. This is mainly because there is no intermediary associated with them and the investor can make his/her own decision independently.
However, the matter of convenience entirely changes if the investor is not financially literate or does not have any idea about mutual funds. In such cases, a regular plan can be more convenient for the investor.
Return Difference between Direct vs Regular Mutual Fund
A direct mutual fund has a low TER (total expense ratio) resulting in higher NAV and ultimately higher returns. On the other hand, a regular mutual fund has a comparatively higher total expense ratio which results in lower NAV and ultimately lower returns.
As there is an intermediary associated with a regular plan, the fund house has to charge a certain amount of commission from the net asset value in the form of a higher TER (Total Expense Ratio).
Example:
Suppose you want to purchase a mobile phone which is manufactured by X company. This company manufactures this mobile phone in its own factory using their in house parts. Let us say the final cost of the Mobile phone is Rs.20,000. Now, an intermediary acts as an ‘agent’ or ‘middleman’ and delivers the mobile to people like you and me, and we, in turn, pay him Rs.22000. The difference (Rs.2000) between the both prices is what the agent earns.
Now replace the X Company with the AMC, the mobile phone with a fund/scheme, and the agent as a mutual fund distributor. The mutual fund distributor is like the middleman between the AMC and the investor. If a mutual fund distributor approaches you and sells you a mutual fund, then he is selling you a ‘regular plan’, which means he is entitled to receive a commission from the AMC for selling this fund to you.
The middleman also gives you his opinion about the thing you are going to buy and helps you to get a thing that is best for your needs and goals, but you are paying more for that thing for the extra services of the middleman.
Benefits of Direct Mutual Fund
Here are some of the benefits of investing in direct mutual funds:
- Lower Expense Ratio:
The TER (Total Expense Ratio) of a direct mutual fund is lower compared to a regular mutual fund scheme. This is mainly because there is no intermediary between a fund house and an investor; therefore AMCs do not have to provide trail commissions to the intermediaries.
- Higher NAV:
A lower expense ratio leads to a higher NAV as the expense ratio is directly calculated on the NAV. The net asset value of a mutual fund is the per unit price of the total assets held by the scheme. In simple terms, it is the ratio of the total number of outstanding units to the current market value of all assets held by a fund.
- Higher Returns:
The biggest advantage of investing in a direct mutual fund is that you can earn higher returns compared to a regular fund. As there is no intermediary associated with it, there is no trial commission associated with it resulting in higher returns.
Benefits of Regular Mutual Fund
Here are some of the benefits of investing in regular mutual funds:
- Expert Advice:
In case you do not possess enough awareness about the world of finance and investments, you can consider investing in mutual funds through an MFD (mutual fund distributor). A well-experienced and informed MFD can help you understand mutual funds thoroughly and various other valuable insights associated with them.
- Goal Based Planning:
Usually, when you are investing through an Investment advisor or an MFD, they usually ask you regarding your financial goals. Accordingly, they will suggest a suitable mutual fund scheme based on your goals, risk appetite and other factors.
- Regular Monitoring:
If you are investing in a direct plan, you need to log into your account and track your investment on your own. In the case of a regular fund, your investment advisor or MFD will review your portfolio on your behalf and suggest changes if needed.
Direct vs Regular Mutual Fund- Which is Better?
Any mutual fund scheme allows investors to invest in two types of plans namely: Direct and Regular. If you have a basic idea of mutual funds and how they work, you can conduct research online regarding various aspects of mutual funds and make your own decision.
In such a scenario, direct investment can be the best option for you as it removes the complexity of dealing with an intermediary. Moreover, you can directly start investing and monitor your portfolio of your own.
If you are not very aware of investments and looking forward to expert assistance, you can consider getting the help of an intermediary. An intermediary can be a mutual fund distributor, investment advisor or your bank's relationship manager. A well-informed intermediary can help you to plan your finances accordingly and help you to make an informed decision.
Conclusion
Hopefully, by now you have got some clarity ondirect vs regular mutual funds. As there is no commission associated with it, investing in a direct fund is quite lucrative and helps you to maximise your mutual fund gains. However, if you do not have any basic financial knowledge, you can consider investing in a regular plan through an intermediary.
Be it a direct plan or a regular one, mutual fund investment carries a moderate to very high risk associated with it, hence try to stay informed and updated about the current market scenario.
Also Read About:
Types of Mutual Funds
Mutual Fund Calculator
How Mutual Funds Work in India With Example
