When you select a mutual fund, you can invest in the scheme via a regular plan or a direct plan. While regular mutual funds have been there since the beginning, immediate plans are relatively new and are still the lesser-known alternative.
Of Late, there have been conflicting opinions about the best way to invest in mutual funds, especially if you are a novice investor. Debunking any myths or misconceptions you may have heard about direct mutual funds; we will cover in this article why they may be the best investment route for you. Read on to know more.
In January 2013, SEBI mandated all mutual fund companies to allow investors to invest in mutual funds via direct plans, without the intervention of brokers, agents, or distributors, as is the case in regular mutual funds. Frequent and direct plans both involve investing in the same fund scheme. They are also managed by the same fund manager who applies the same fund management strategy, asset allocation, and investment portfolio for both plans.
The only difference between the two is that in the case of a regular plan, your AMC or mutual fund house does pay a commission to your broker as distribution expenses or transaction fees out of your investment. In contrast, no such commission is paid in the case of a direct plan.
Certain annual expenses are associated with the management of mutual funds that the AMC charges you when you invest your money. This fee, expressed as a percentage of the average value of fund assets, is called an expense ratio.
Since the investment in regular mutual funds is facilitated by a broker, he charges a certain amount as commission, borne by the AMC. This cost is paid as a percentage of the investment you made in the mutual fund. On the other hand, since investing in direct plans is devoid of brokers, there is no commission, so you are not charged any fee.
In short, a direct mutual fund's expense ratio is lower than the expense ratio of the regular plan of the same scheme. This difference in fees also translates to higher returns via the direct route than the regular route.
As evident, if you are someone who has not started his investment journey yet and is confused between regular or direct, the answer is obvious. Earlier, there was little awareness of fund mutual funds, and people did not have the financial knowledge to take investment decisions themselves. However, with the availability of platforms like Groww that provide you with all necessary fund comparison features and other educational resources to take a decision, you no longer need to be dependent on an external agent for advice and lose money on commissions.
This will also protect you against malpractices from agents and brokers, like investing your money in poor-performing funds or funds not aligned with your investment objectives or risk profile to earn a higher commission.
However, what to do if you are already invested via a regular plan?
The good news is you can switch your investments to a direct plan of the same scheme within minutes on Groww and avoid losing more commissions. So let's see how we can do that.
There are many reasons why you should choose Direct Mutual Fund Plans over Regular Mutual Fund Plans. First, the Direct Plan offers a higher level of return than the Regular Plan. Let us look deeper into why direct plans are better than regular ones.
Direct plans have higher returns than regular mutual funds because they invest in more volatile stocks. In addition, direct plans are more aggressive than regular mutual funds, which means they can be more profitable for investors.
Direct mutual funds tend to have lower expense ratios than regular ones because they use smart investments to achieve their goals. On the other hand, regular mutual funds charge much higher fees because they invest less aggressively and take on additional risk by using leverage (borrowing money).
Direct plans have higher net asset values because they invest in more stable assets than regular ones and because their fees are lower.
Over the years, mutual funds have been consistently rated as one of the most lucrative investment options to grow your money. Direct mutual fund plans are great if you enjoy passive income through dividend income and want to make the most of your investment opportunities.