1. Direct Mutual Funds
Mutual funds an investor buy directly from an asset management company (AMC) are direct plans. They are introduced mainly for three types of mutual funds. One is open-ended funds except for those that are closed or withdrawn and ETFs. Two, New Fund Offers (NFO), both open-ended and close-ended – should be of Fixed Term Plans or Capital Protection Oriented Schemes. Three, interval funds started from the first day of the stated transaction period.
In direct mutual funds, there will be no role for intermediaries or brokers. Investors are free from commission or distribution fees, which brings down the expense ratio. Even when you start an SIP or make a lumpsum investment, they will not levy any transaction charges. This is because you are directly paying the mutual fund company. They have a different Net Asset Value (NAV), and the prospectus will specify “Direct” to help investors identify direct plans.
2. Regular Mutual Fund Plans
When you buy a mutual fund through a mutual fund broker, distributor or advisor, it is called a regular plan. For every regular fund, the fund house pays commission to the middleman for bringing a new investor to their plan(s). The AMC will add this commission to the expense ratio. This is why regular funds are slightly more expensive than direct funds.
At a glance, direct funds can seem a good deal as it is cheaper. For regular funds, this extra money is for the services from the agent/broker/distributor. However, the hasty decision to choose a low-priced mutual fund may not always work to your advantage. Unless you are well-informed do-it-yourselfers, you might need help to research and choose a fund as per your requirements. In that case, regular funds would be a better choice.
3. Difference between direct & regular funds
In a regular plan of a mutual fund, a sales commission is paid to the middleman or brokers who get business for them. the amount of commission varies between 1-1.25 percent per year. Although your monthly statement doesn’t reflect this amount, the NAV or net asset value of your mutual fund units get adjusted for this. In case of a direct plan, there is no middleman between the investor and the mutual fund company. From a direct plan, AMCs do not pay any sales commission, so annual returns are generally 1-1.25 percent higher in case of a direct plan.
|Expense ratio||Lower||Higher (commission to intermediary)|
|Research & market knowledge required||Perfect for the market and investment savvy||The qualified intermediary guides as per the individual goals and risk appetite|
|Returns||More as the expense ratio is lesser||Less as the AMC fee is more|
As you can see from the above example, returns of a particular fund between a direct plan and a regular plan vary between 0.8-1.25 percent per annum. This could be a significant amount over the long term. For example, if you invest Rs 10 lakh in a regular mutual fund plan for 20 years, then it will grow to Rs 9,646,293 in a regular plan, assuming the fund delivers a CAGR of 12 percent. While the same amount could grow to Rs 11,523,087 at a CAGR of 13 percent, if invested in a direct plan, that is a difference of whopping 19.45 percent.
4. Advantages of regular funds over direct funds
Even though direct plans means lesser expense ratio, it needs more of an effort from the investor. Investors have to shortlist funds based on their goals and risk profiles, and then shortlist funds that meet their needs. An intermediary will already have an understanding regarding these.
b. Expert guidance
Comparing and analyzing mutual fund performance and matching it with an investor’s financial goals and risk profile requires in-depth knowledge. A qualified professional (agent/distributor) can guide you towards the right investment portfolio. Also, they can impart you with their market expertise and get you to invest in funds that give good returns.
c. Regular monitoring and reviewing
An individual investor may not have the time, patience or knowledge to review his portfolio every now and then. Here, the distributor review your portfolio returns and help you re-balance the asset allocation, as required. This can lead to even better returns. Doesn’t this justify the additional expense ratio?
d. Value-added services
Regular plans don’t stop at selling you a mutual fund or reviewing it regularly. They help you facilitate and track your investment. Therefore, it is more consumer-friendly.
5. Why invest with ClearTax
ClearTax Save offers you handpicked plans, but they are regular plans. Your expense ratio will be slightly more than that of direct plans. However, they come with a slew of benefits.
With hundreds of options, investors might find it daunting to shortlist and finalize the fund(s), he wants to invest in. There are plenty of parameters to consider and analyze before choosing. Reputation of the fund house, age of the fund, past returns and financial ratios to name a few. We have done all the homework and present investors with a diverse choice of portfolios. Investors can choose one as per their financial goal and budget like tax-saving, short-term or long-term. Start investing.
In short, both direct and regular plans have its set of pros and cons. However, you should remember that there is absolutely no difference in the portfolio composition and investment strategy of both. The difference in returns is purely due to the commission paid to the middleman. So, start investing, and choose one that suits your investment acumen.