Mutual Funds

Mutual Fund Investment: Why are Direct Mutual Funds better than Regular Funds.

Mutual Fund Investment: Why are Direct Mutual Funds better than Regular Funds.

Every mutual fund is available in two flavours, i.e. Regular and Direct, irrespective of the scheme’s exposure and types. Back in 2013, SEBI made mandatory for all AMCs (asset management companies) to offer direct plans which would a give an option to invest in mutual funds without paying any commission or advisory fees to brokers, agents and distributors.

Regular and Direct plans are just the two options to buy the same mutual fund scheme, run by the same manager who invests in the same stocks and bonds with the same amount of exposure in them. The only difference between the two is that in the case of a regular plan your AMC or fund house pays a commission to your broker or the middle man as distribution expenses or transaction fee out of your investment, whereas in case of a direct plan, no such commission is paid. The amount of commission varies between 1 and 1.5 per cent per annum. Although your monthly statement doesn’t reflect this amount, the NAV or net asset value of your mutual fund units adjusts accordingly which is not the case in the direct scheme.

You can gain extra return compared to regular scheme. In direct plans the commission is added to your investment balance, thereby reducing the expense ratio of your mutual fund scheme and increasing your return over the long term.

NAV of the direct plan would be higher compared to a regular plan. However, the investment objective and investment mix of the scheme portfolio would be the same for direct or regular plans. Your agent will probably tell you that it doesn’t really matter which plan you invest in. After all, he only earns a small fee for his services. But that small fee adds up to a lot! Take the case of a 40-year old investor putting Rs 10 lakh in a Regular Plan of a Mutual Fund, which grows at 8% a year (less 1% commission). When he retires at age 65, this investment would be worth Rs 76 lakh. On the other hand, if he switched to a Direct Plan of the same Mutual Fund and eliminated this 1% annual commission, his retirement pot would become Rs 1 crore over the same period.

In other words, a quarter of your hard-earned money ends up in the commission to the broker instead of the investment in the scheme. Whereas, regular plans don’t stop at selling you a mutual fund or reviewing it regularly. They help you facilitate and track your investment, which is more consumer-friendly.

When you’re looking to invest your savings into Mutual Funds, you should look for an investment advisor that actually works in your interest. Most expert advisors these days will not sell or recommend Regular Mutual Funds because these end up costing you a recurring, hidden brokerage fee, year after year. These are good for investors who want to increase their returns by way of reducing the expense ratio. To understand the choice, let’s see what kind of investor is suited for direct investments. It would have to be someone who understands what kind of mutual funds are needed for different kinds of investment needs, is capable of researching these independently and come up with a list of funds to invest in, and then go through the process of actually investing without the help of a broker or agent.