Mutual funds are an investment vehicle that pools money from multiple investors to invest in various assets, such as stocks, bonds, debentures, and money market instruments. Investors in a mutual fund scheme receive units equivalent to their investment, which can be redeemed as needed or according to the terms and conditions of the mutual fund scheme. The value of these units fluctuates based on the mutual fund scheme's performance.
You can invest in a mutual fund scheme in two ways: directly investing through an AMC or through an intermediary (regular plan). However, many people still get confused between the Direct plan and the Regular plan before investing in this 57 trillion Indian Mutual Fund Industry. Here, we will dive deeper into direct vs regular mutual funds, key differences, benefits and much more. Read along to get further insights about the same.
What is a Direct Mutual Fund?
A Direct mutual fund is a type of scheme in which you are directly investing through an AMC (Asset Management Company) that manages the mutual fund. As you are purchasing the plan directly from the fund houses there are no brokers involved with it; hence, no commission is required to be paid.
As a result, you can gain higher returns from direct mutual funds as they carry lower expense ratios due to no commissions being associated with these funds.
What is a Regular Mutual Fund?
A regular mutual fund is a type of plan which involves an investment with the help of an intermediary which can be a broker or a mutual fund distributor. The intermediary must have an ARN (AMFI Registration Number) which authorises them to deal with mutual funds.
These intermediaries play a crucial role in spreading financial literacy among investors and helping them understand every aspect of a mutual fund scheme. Regular mutual funds attract higher expense ratios, a proportion of which is paid to the distributor or broker in the form of a trail commission.
What is Expense Ratio?
The Total Expense Ratio (TER) is a fee charged by Asset Management Companies (AMCs) for managing investors' money. This fee covers various costs, including investment management, advisory fees, trustee fees, marketing, selling expenses, and distributor commissions, and is calculated against the fund's daily average net assets. The Net Asset Value (NAV) is determined each day after these expenses are accounted for, making the investor bear the costs.
Comparatively Direct Plans have a lower expense ratio since they exclude distribution expenses and commissions. According to ACEMF data, the expense ratio difference between direct and regular plans for all equity-oriented schemes in April 2024 ranged from 30 to 190 basis points (bps), where 100 bps equals 1 percent.
Returns of Direct Mutual Funds vs Returns of Regular Mutual Funds
A direct mutual fund has a low TER (total expense ratio) resulting in higher NAV and ultimately higher returns. On the other hand, there is an intermediary associated with a regular plan and the mutual fund house gives intermediary a certain commission to sell their mutual fund schemes. Then fund house charge a higher TER (Total Expense Ratio) from investors which results in lower NAV and ultimately lower returns.
Example:
Suppose you want to purchase a mobile phone which is manufactured by X company. This company manufactures this mobile phone in its own factory using their in house parts. Let us say the final cost of the Mobile phone is Rs.20,000. Now, an intermediary acts as an ‘agent’ or ‘middleman’ and delivers the mobile to people like you and me, and we, in turn, pay him Rs.22000. The difference (Rs.2000) between the both prices is what the agent earns.
Now replace the X Company with the AMC, the mobile phone with a fund/scheme, and the agent as a mutual fund distributor. The mutual fund distributor is like the middleman between the AMC and the investor. If a mutual fund distributor approaches you and sells you a mutual fund, then he is selling you a ‘regular plan’, which means he is entitled to receive a commission from the AMC for selling this fund to you.
The middleman also gives you his opinion about the mutual fund scheme you are going to invest in, and helps you to get a scheme that is best for your needs and goals, in the end you are paying more for that investment scheme but also getting the expert services of the middleman.
Empact of Expense Ratio on Returns
For instance, you invest Rs. 25000 monthly through SIP in a mutual fund scheme for 30 years with an expected rate return of 12%. In a regular plan where you are paying 1.5% expense ratio, the accumulated corpus would be Rs. 6.3 crore. However, with the direct plan, where the expense ratio is 1%, this accumulated amount would be 7.8 crore. The 0.5% difference in expense ratio could cost 1.5 crore, which is approximately 25% more than the regular plan.
Difference between Direct and Regular Plans
Here are some of the key differences between a direct and a regular mutual fund scheme:
- Intermediary:
In a direct mutual fund, there are no intermediaries present between the fund house and the investor. In it, you are directly dealing with the AMC. On the other hand,in a regular plan, there is an intermediary in-between the AMC and the investor. It can be a broker, a mutual fund distributor or a relationship manager of a bank.
- Expense Ratio:
The expense ratio of a regular plan is always higher compared to the direct plan of the same fund. This is because the fund house also has to pay commissions to its intermediaries. Direct plans exclude commissions and distribution expenses from investor costs. This leads to lower expense ratios. As a result, direct plans offer higher returns than regular plans.
- NAV (Net Asset Value):
The net asset value (NAV) of a mutual fund is directly affected by the total expense ratio (TER) of the scheme.Regular planshave a higher total expense ratio when compared to direct plans. As a result, the NAV (Net Asset Value) of a regular fund is lower as compared to a direct plan.
- Convenience:
Direct mutual fund plans are considered more convenient compared to regular mutual funds. This is mainly because there is no intermediary associated with them and the investor can make his/her own decision independently.
However, the matter of convenience entirely changes if the investor is not financially literate or does not have any idea about mutual funds. In such cases, a regular plan can be more convenient for the investor.
Benefits of Direct Mutual Fund
Here are some of the benefits of investing in direct mutual funds:
- Lower Expense Ratio:
The TER (Total Expense Ratio) of a direct mutual fund is lower compared to a regular mutual fund scheme. This is mainly because there is no intermediary between a fund house and an investor; therefore AMCs do not have to provide trail commissions to the intermediaries.
- Higher NAV:
A lower expense ratio leads to a higher NAV as the expense ratio is directly calculated on the NAV. The net asset value of a mutual fund is the per unit price of the total assets held by the scheme. In simple terms, it is the ratio of the total number of outstanding units to the current market value of all assets held by a fund.
- Higher Returns:
The biggest advantage of investing in a direct mutual fund is that you can earn higher returns compared to a regular fund. As there is no intermediary associated with it, there is no trial commission associated with it resulting in higher returns.
Benefits of Regular Mutual Fund
Here are some of the benefits of investing in regular mutual funds:
- Expert Advice:
In case you do not possess enough awareness about the world of finance and investments, you can consider investing in mutual funds through an MFD (mutual fund distributor). A well-experienced and informed MFD can help you understand mutual funds thoroughly and various other valuable insights associated with them.
- Goal Based Planning:
Usually, when you are investing through an Investment advisor or an MFD, they usually ask you regarding your financial goals. Accordingly, they will suggest a suitable mutual fund scheme based on your goals, risk appetite and other factors.
- Regular Monitoring:
If you are investing in a direct plan, you need to log into your account and track your investment on your own. In the case of a regular fund, your investment advisor or MFD will review your portfolio on your behalf and suggest changes if needed.
Direct vs Regular Mutual Fund - Which one is Better?
Any mutual fund scheme allows investors to invest in two types of plans namely: Direct and Regular. If you have a basic idea of mutual funds and how they work, you can conduct research online regarding various aspects of mutual funds and make your own decision according to your goals and risk appetite.
In such a scenario, direct investment can be the best option for you as it removes the complexity of dealing with an intermediary. Moreover, you can directly start investing and monitor your portfolio of your own.
If you are not very aware of mutual fund investment options and do not have a eagle's eye for market, then don't hesitate getting the help of an intermediary. According to AMFI data, 55% investment still comes through regular plan. An intermediary can be a mutual fund distributor, investment advisor or your bank's relationship manager. A well-informed intermediary can help you to plan your finances accordingly and help you to make an informed decision.
Conclusion
Hopefully, by now you have got some clarity ondirect vs regular mutual funds. As there is no commission associated with it, investing in a direct fund is quite lucrative and helps you to maximise your mutual fund gains. However, if you do not have adequate knowledge of mutual funds, you can consider investing in a regular plan through an intermediary.
Be it a direct plan or a regular one, mutual fund investment carries a moderate to very high risk associated with it, hence try to stay informed and updated about the current market scenario.
Also Read About:
Types of Mutual Funds
Mutual Fund Calculator
How Mutual Funds Work in India With Example
