I am a beginner in Mutual Funds. I want to know what is direct mutual funds and how are they different from Regular mutual funds. Which one should I go for?Asked
Direct plans give investors the opportunity to bypass mutual fund brokers and invest directly is desired mutual fund schemes. An investor can buy a direct mutual fund directly from the mutual fund company (generally from the MF Company’s website).
Whereas a regular mutual fund is bought via intermediaries, usually mutual fund brokers, advisors or distributors. In regular mutual funds, the intermediaries receive commission from the mutual fund companies for performing their services. Such commission is later recovered as an expense in a regular plan, thereby making the plan more costly as compared to a direct plan.
Therefore, all things remaining same, it is safe to say that in a direct plan, investors gain higher returns vis-à-vis regular plan.
However an investor must jump to the conclusion that since the returns are higher in a direct plan, it is a better or optimal choice. It is important to understand that each fund exists for a particular reason, as it caters to a particular need or solves a particular problem and there exists a demand for it.
Why regular plan?
1. Novice investor- For investors who have started their investment journey and don’t have requisite expertise or knowledge about the intricacies of investing, a regular plan provides the requisite expertise of an expert fund advisor.
2. Investment recommendation- Which stock to pick or which fund to invest in, is one of the most critical choices to be made by an investor. Making use of the recommendations of an expert fund advisor i.e. correct choice of stock at the correct time can significantly increase returns.
3. Periodic review – Fund advisors periodically review the position of the funds’ investments, identify any deviations from the target. On the basis of their expectations / target they rebalance the portfolio.
4. Additional services- Regular plans also provide its investors various value added services like facilitating investment, tracking portfolio among others.
For investors having deep knowledge and confidence to pick their own stocks and track them on a regular basis, direct plan should be the ideal choice saving them the extra expense cost and providing higher returns. For others, a regular plan provides the opportunity to gain from the expertise and services of a professional fund advisor.
Direct plans are the investment bought directly from the respective AMCs. If have sound financial knowledge and capability to track it regularly yourself, direct is a good option because the expense ratio will be lower than regular plans (0.5-1.25% on). Regular plans are the plans bought through platforms such as groww. You can make and track all investments in one place, and get regular assistance in choosing and managing investments over time. The choice should be made accordingly.