Mutual funds offer a convenient and accessible way to invest in the stock market or other instruments, even for those with limited financial knowledge. They pool funds from multiple investors and invest them in a diversified portfolio of assets, allowing you to benefit from professional management and diversification without picking individual stocks or bonds.
However, before investing, you must know some of the key characteristic features that mutual funds are assessed by. One of these features is whether the mode of your investment in a mutual fund is a direct plan or a regular plan. In this article, learn about the characteristics and differences of direct and regular plans in a mutual fund.
Understand the Expense Ratio in a Mutual Fund
Before understanding the difference between regular and direct mutual funds, it is important to know what is an expense ratio.
An expense ratio in a mutual fund is a percentage that represents the annual costs associated with managing and operating the fund. It includes expenses like management fees, administrative costs, and other fees incurred in the fund.
For example, if you’re investing in an Indian mutual fund with a 2% expense ratio, and you invest ₹10,000, then ₹200 would be used to cover these expenses in the first year. So, your actual investment in the fund would be ₹9,800.
What are Direct Mutual Funds?
Direct mutual funds are a category of mutual funds offered directly by the Asset Management Company (AMC) or fund house without the mediation of third-party distributors. This means that there are no commissions or brokerage fees associated with these funds. As a result, the expense ratio of direct mutual funds is usually lower compared to regular mutual funds. This reduced expense ratio contributes to higher returns for investors.
Direct funds can be purchased through both online and offline channels, providing investors with flexibility in their investment approach. By eliminating the intermediary layer, direct mutual funds empower investors to access the financial markets at a lower cost.
What are Regular Mutual Funds?
Regular Mutual Funds refer to mutual fund plans purchased through intermediaries, such as brokers, advisors, or distributors. These intermediaries facilitate the sale of mutual funds and charge a fee for their services. The fee charged by intermediaries is covered by the fund house under the mutual fund’s expense ratio, which is typically slightly higher compared to direct mutual funds.
The relatively higher expense ratio of regular plans is due to the commissions and fees associated with the involvement of intermediaries. Consequently, the returns on regular mutual funds tend to be lower than direct plans.
Regular plans are better suited for investors who lack market knowledge or the time to manage their portfolios actively. These plans offer the convenience of expert advice provided by intermediaries, albeit at a cost. They are particularly beneficial for investors seeking guidance and support in their investment decisions. Regular plans give the investors a level of convenience despite the higher associated expenses.
Differences Between Direct and Regular Plans
| Parameter | Direct Plan | Regular Plan |
| Third-Party Distributor | Not present | Present |
| Expense Ratio | Lower, as there are no additional fees or brokerage | Higher, as additional brokerage or fees need to be paid |
| Net Asset Value (NAV) | Higher NAV, due to lower expense ratio | Lower NAV, due to higher expense ratio |
| Returns | Slightly higher returns due to lower expenses | Slightly lower returns due to higher expenses. |
| Guidance and research | Investors must do all the research on their own | Investors get help from the broker on market research. |
| Investment Process | Investors apply directly with the AMC | Investors apply through agents/distributors |
From the above table, we can make some clear differences between direct and regular plans for mutual funds:
- The NAV is higher for a direct mutual fund, as the expense ratio is lower for direct funds. That means, for the same returns obtained from a fund, a lesser amount is charged under the expense ratio under a direct plan.
- In the case of a regular plan, you will be offered the services of an advisor who will assist you in multiple mutual fund investments in various ways. Their services will include investment advisory and facilitation of investments by assistance in various procedures and documentation. In the case of a direct plan, there will be no such assistance.
Which is Better – Direct Vs Regular Mutual Fund?
Whether a direct mutual fund is better for you or a regular one depends on the following factors:
- Your capability as an investor: If, as an investor, you are capable of understanding all the data related to the mutual fund and can take an informed decision, you may not need the help of an advisor. Therefore, a direct plan can be better for you. However, if you are not capable or confident of making investment decisions without professional help, it is best that you go for a regular plan.
- Technological and other resources: You may be a capable investor, but still, a professional in an organised setting may give you better insights into the market. This may be because the professional investor has access to expensive, cutting-edge technology that gives them an edge over any individual investor.
Moreover, professionals may have a team of analysts feeding them with regular updates on the market that will put them ahead of you in terms of sheer knowledge of the market trends, funds and individual companies. In that case, you may want to take the help of a professional under the direct plan.
Advantages of a Regular Plan Over Direct Plan in Mutual Funds
You may be new to the world of investing, or you may be short of time and resources to make informed investment decisions. In both cases, having a regular plan may be a small price to pay for choosing the right funds to invest in with less effort.
The following are some advantages of investing in a regular plan mutual fund over a direct one:
- Ease of operation – A regular mutual fund plan may be more expensive. Still, it reduces a lot of burden for you. This is because, without a regular plan, you will have to understand your own risk profile, the risk and return potential of multiple funds and then match the right set of funds to your goals and risk profile. However, a professional can help you do this more efficiently under a regular plan.
- Monitoring fund performance and markets – You may not have adequate time every day to monitor the performance of your portfolio. You may not also be adequately aware of the market trends. Thus, you may be under-prepared to rebalance your portfolio as per the market trends as and when required.
- Other valuable services – An intermediary can offer several additional services of value. These may include keeping accounts of your investments, helping out in tax filing and submitting KYC documents, facilitating redemptions, etc. These services may not be available under direct plans.
How To Recognise if a Mutual Fund Is Regular or Direct?
Identifying direct or regular mutual funds is straightforward as they are labelled with the word “Direct” or “Regular” in the fund’s name. This nomenclature indicates that the fund is available for either direct or regular mode of investment.
You can also refer to your Consolidated Account Statement (CAS) to identify the regular or direct plan. In your CAS, there is a field called ‘Advisor’. If the scheme is a regular plan, you can find an ‘ARN’ number mentioned under ‘Advisor’.
Conclusion
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FAQs
Which one is better for mutual funds, direct plan or regular plan?
Choosing a direct plan or a regular plan for your mutual fund investments really depends on whether you are confident that the services of a professional is not worth the additional fees that you may have to pay under the regular plan. For new investors, regular plans may be better, while seasoned investors may be more comfortable with direct plans.
When should I switch from a regular plan to a direct plan in mutual funds?
You can consider switching from a regular plan to a direct plan when you are comfortable with the idea of handling your own investments end-to-end. This further depends on your level of knowledge of markets, the amount of time you can give to your mutual fund investments, etc.
Apart from a higher expense ratio, are there any further issues with regular mutual funds?
There is no particular harm in taking up a regular plan in mutual funds, apart from the higher expense ratio. However, it is important that you learn the art of investing over time and get help from professionals in understanding the market. Otherwise, a regular plan and constant support may fail to give you the incentive to learn about investing.
What are some of the disadvantages of direct plan mutual funds?
If you have taken up a direct plan for mutual fund investments, you will lack support from a professional in terms of investment and portfolio advisory, assistance in the documentation of investments and related compliances, etc. Over time, the extra work may burden you and affect your investment decisions too.
Can I convert my regular mutual fund plan to a direct plan?
Yes. You can switch from a regular mutual fund to a direct plan. However, the switch is considered as the redemption of the regular plan, and the fees associated at the time of redemption of a mutual fund will be incurred.
