As per the Securities and Exchange Board of India (SEBI), mutual funds come in two categories – direct and regular selling of funds. You buy the former directly from an asset management company, while you can buy the latter from an intermediary. Why spend more on a regular plan when you can buy the same at a lower cost in a direct plan? We have covered the following in this article
Mutual funds that are directly purchased from an asset management company (AMC) are referred to as direct plans. There are three mutual fund types you can buy.
In the direct mutual funds, agents, brokers, or other intermediaries have no role. Investors are free from commission or distribution fees, which brings down the expense ratio. Even when you start a SIP or make a lump sum investment, they will not levy any transaction charges as you are directly dealing with the mutual fund company.
They have a different Net Asset Value (NAV), and the prospectus will specify ‘Direct’ to help investors identify direct plans.
Regular funds are those mutual funds that are bought through a mutual fund broker, distributor, or advisor. For every regular fund, the fund house pays a commission to the middleman for introducing a new investor to their plan(s). The AMC will add this commission to the expense ratio, and hence, regular funds are slightly more expensive than direct funds. At a glance, direct funds seem to be a better deal as they are cheaper.
For regular funds, these extra charges are for the services that you avail from an intermediary you buy from – agent, broker, or distributor. However, the decision to choose a low-priced mutual fund may not always work for your advantage. Unless you are a well-informed do-it-yourselfer, you might need help in researching and selecting funds as per your requirements. In this scenario, regular funds would be a better choice.
In regular mutual funds, the sales commission is paid to intermediaries or brokers who get business for them. The amount of commission varies between 1% to 1.25% a year. Although your monthly statement doesn’t reflect this amount, the NAV or net asset value of your mutual fund units will be adjusted accordingly.
From direct plans, AMCs do not pay any sales commission, so annual returns are generally 1% to 1.25% higher in case of a direct plan. However, an intermediary understands your investment profile and risk appetite and guides you accordingly. A certified financial expert can save you plenty of time by picking the best plan to suit your requirements.
|Particulars||Direct Plan||Regular Plan|
|Expense ratio||Lower||Higher (commission to the 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, the returns of a particular fund between a direct plan and a regular plan vary between 0.8% to 1.25% annually. But it all depends on how knowledgeable you are when it comes to the markets. Happy customers are instrumental to the reputation of distributors. So, they are sure to recommend only the best ones.
Even though direct plans means less expense ratio, it needs more efforts from the investors to make optimum gains. Investors have to shortlist funds on their own based on their goals and risk profiles, and then choose that fund which meets their requirements. An intermediary will already have an understanding of all these.
Comparing and analysing 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 in picking the right investment portfolio. Also, they can impart you with their market expertise and advise you to invest in funds that offer excellent returns.
An individual investor may not have time, patience, or knowledge to review his portfolio regularly. Here, the distributor reviews your portfolio returns and help you re-balance the asset allocation if needed. This can lead to even better returns. This justifies the additional expense ratio.
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 investor-friendly than direct funds.
ClearTax Invest offers you handpicked Direct plans, they come with a lot of benefits. With hundreds of options, investors might find it difficult to shortlist and finalise the right fund(s). The following are some of the parameters to consider; the reputation of the fund house, the age of the fund, past returns, and financial ratios.
We have done all the work and present investors with a diverse choice of portfolios. Investors can choose as per their financial goal and budget, such as tax-saving, short-term, or long-term. Start investing!
In short, both direct and regular plans have their pros and cons. However, it would be best if you remembered that there is 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.