Direct Funds vs Regular Funds – Difference between Direct & Regular Plans
Role of a financial advisor
Whenever you make any investment, you have two options. You take the direct route by doing your research and accordingly make the investment. If you don't have the knowledge and don't even have the time to do research, you can take the regular route of availing the services of a financial advisor and accordingly invest. Mutual funds also offer you these two options. In this article, we will discuss direct funds vs regular funds – Difference between direct and regular plans.
What are regular mutual funds?
A regular mutual fund is where the advisory services of an intermediary are involved. An investor either doesn’t have the knowledge of which mutual fund scheme to invest in or doesn’t have the time to research. Hence, they avail of the services of an intermediary like mutual fund distributor (MFD), who will recommend regular mutual funds based on the investor’s needs.
The MFD charges a commission to the AMC for their services. The AMC, in turn, charges this commission to the mutual fund scheme. Hence, the expense ratio of a regular mutual fund scheme is higher. An investor can buy regular mutual funds through an individual MFD, brokerage firm, an online platform like Scripbox, etc.
What are direct mutual funds?
Not all investors need to avail themselves of the services of an intermediary. They have knowledge of mutual funds and can research the appropriate scheme for investment on their own. An AMC offers a direct plan for such investors. Every mutual fund scheme has a regular as well as a direct plan. In a direct plan, there is no commission paid to any intermediary. Hence, a direct mutual fund scheme's expense ratio is lower than a regular mutual fund scheme.
An investor can buy a direct mutual fund directly from the AMC (directly from the website or visiting their office) or through an online platform like Glide Invest. In the case of online platforms like Glide Invest that recommend direct plans, no commission is paid even though an intermediary is involved.
Direct vs regular mutual fund
In the above section, we understood what a direct and regular mutual fund is. Now let us understand the difference between direct and regular mutual fund.
Table: Direct mutual fund vs regular mutual fund
|Regular mutual fund||Direct mutual fund|
|Intermediary||The services of an intermediary are involved to whom a commission is paid.||No commission is paid, even if an intermediary is involved.|
|Scheme selection||The intermediary recommends the scheme for investment based on the investor’s needs.||The investor has to do their research and select the scheme for investment.|
|Expense ratio||The expense ratio is always higher than the direct plan of the same scheme.||The expense ratio is always lower than the regular plan of the same scheme.|
|NAV||The NAV is always lower than the direct plan of the same scheme.||The NAV is always higher than the regular plan of the same scheme.|
|Returns||The returns are always lower than the direct plan of the same scheme.||The returns are always higher than the regular plan of the same scheme.|
Direct or regular mutual fund which is better?
If you compare regular vs direct mutual fund in terms of returns, direct funds will always give better returns. As there is no commission to be paid for regular plans, their NAV is always higher than regular plans. Hence, direct plans will always give higher returns compared to regular plans.
Who should invest in direct plans?
If you have good knowledge of mutual funds and already have a financial plan for all your financial goals, you may go for direct plans. You may go for direct plans if you know which mutual fund schemes to invest in and how to review them regularly.
However, if you are a beginner in the world of mutual funds or can’t spend much time on your investments, you will need hand holding from a financial advisor. A financial advisor can help you:
- Identify your financial goals
- Make a financial plan for each goal
- Do your risk assessment and recommend the right asset allocation
- Within each asset class, recommend the financial products like mutual fund schemes to invest in
- Do regular reviews (either quarterly, half-yearly, or yearly) and recommend changes whenever required till you achieve your financial goals.
So, if you plan to avail of the services of a financial advisor, you can go for investing in regular mutual funds as per their recommendation.
When you choose a direct plan, you will earn slightly higher returns than the regular plan of the same mutual fund scheme. However, suppose you choose the direct route without adequate knowledge and invest in the wrong mutual fund scheme/s. In that case, it can prove to be a disaster for your overall investment portfolio.
Direct fund vs regular fund: Which one should you choose?
When choosing between a direct plan vs regular plan, please weigh the pros and cons of both. Also, evaluate your knowledge level of mutual funds and how much time you have on hand to research and select your mutual fund schemes and review them regularly. If your response is a firm affirmative for both, you may choose to go for direct funds. But, if you are not confident about either one or both, it is better to play safe and avail of the services of a financial advisor. In such a scenario, the financial advisor can be the difference between whether you will achieve your financial goals or not.
To read more on similar topics, click below: