Over the past few years, there has been a lot of buzz around direct plans when it comes to investing in mutual funds. However, a large number of people don’t understand the difference between a regular and a direct plan and which they should go for. If you have the same questions in your mind, then you are at the right place.
Primarily, the difference between regular and direct plans of a mutual fund scheme arises from the difference in their cost structure and how these plans are invested in.
What is a Regular Mutual Fund?
Regular plans involve investing through an intermediary like a financial advisor or a bank’s relationship manager. As the intermediaries sell these plans, they tend to have a higher expense ratio as the fund houses have to give commissions to them. These plans suit the investor who needs continuous support and guidance from the financial advisor.
What is a Direct Mutual Fund?
Direct mutual fund plans allow you to invest in the mutual funds with the fund houses directly. In these types of plans, you purchase directly from the fund house hence, there is no broker involved, no commission needs to be paid, and finally, it results in a lower expense ratio. Platforms like ET Money allow you to conveniently invest in mutual fund direct schemes at zero brokerage and zero commission.
Differences Between Direct and Regular Mutual Fund Plans
Direct and regular plans are the two variants of any mutual fund scheme that differ on the basis of how you invest in them. Hence, it is important to understand the difference between them. Here are some of the key differences based on Net Asset Value (NAV), Returns, and the Role of the Financial Advisor:
- Net Asset Value: Fund houses incur various expenses for managing the fund, which are charged from the NAV of the fund. This is known as the expense ratio. As the regular fund has a higher expense ratio due to the commission and brokerage involved, the NAV of the regular schemes is generally lower than the direct plans since there is no commission or brokerage in direct plans.
- Returns: Direct plans offer higher returns due to a lower expense ratio than regular funds. You get the benefit from the exclusion of distributor commissions, which leads to higher returns. Unlike direct plans, regular plans have a higher expense ratio, which eats out your return and offers slightly lower returns.
- Role of Financial Advisor: In direct plans, you directly deal with the asset management company. Here, you invest in the scheme as per your own decision and requirement hence, there is no role of financial advisor. However, in the case of regular plans, financial advisors assist you in the investment process. They help you decide where to invest and how much to invest based on your investment objectives.
Benefits of Regular Mutual Funds
While both regular and direct mutual fund plans have their own advantages, there are some benefits of the regular funds for specific investors. Here are some of the benefits of regular funds over direct funds:
- Financial Advisor Assistance: While investing in regular funds, financial advisors help you to identify suitable funds based on risk appetite and investment objectives. Hence, if you are a new investor needing continuous support and advice, regular funds will help you in this case.
- Regular monitoring: In direct funds, you have to monitor the performance of the fund on your own; however, in regular funds, your financial advisor monitors and reviews your portfolio on your behalf and suggests portfolio changes if required.
- Goal-Based Planning: When you invest in regular plans, your financial advisor or distributor helps you prepare a customized investment plan that matches your financial goal. This personalized approach can help you to navigate the complexities of market fluctuations and stay focused on long-term objectives.
Which is Better Direct or Regular Mutual Fund?
Direct and regular are the two investment options for the same scheme the fund houses offer. The decision of choosing between direct and regular mutual funds depends on your requirements and investment objectives.
Regular funds are suitable for investors needing continuous support or hand-holding from financial advisors to make investment decisions. They can provide personalized advice, aiding in creating a goal-based investment plan. But, all these benefits come with costs; hence, the expense ratio of these funds is higher, as they charge commission and brokerage for their services. The difference between the expense ratio of regular and direct funds is minimal, but it can significantly affect your returns in the long term.
Direct funds are suitable for investors seeking cost efficiency and higher returns. With lower expenses and zero commission and brokerage, direct funds allow you to earn a maximum return in the long term. The cost-effectiveness of direct funds is particularly appealing to investors who are comfortable with independent decision-making and research. As in direct plans, you directly invest on your own; hence, if you are confident in making an independent investment decision, then direct funds fit the bill.
So, if you need regular support and guidance from a professional advisor, you can proceed with regular funds. However, if you are looking for a cost-effective option with zero commission and brokerage and want to earn maximum returns in the long term, then you should consider direct funds.
How To Recognize If a Mutual Fund is Regular or Direct?
Many investors get confused between direct and regular funds, and due to this confusion, they may end up choosing an incorrect option. Here are some of the key indicators that can help you to identify which funds are regular or direct:
- Name of Fund: Regular funds have the term ‘Regular’ or ‘Reg’ in the name of the mutual funds scheme. Similarly, direct funds have ‘Direct’ or ‘Dir’ attached to the scheme’s name.
- Expense Ratio: You can check the expense ratio of both types of plans. Generally, regular plans have a higher expense ratio than direct plans.
- Net Asset Value (NAV): You can also check the fund’s NAV. Generally, direct plans have a higher NAV compared to regular plans.
- Consolidated Account Statement (CAS): You can also check your CAS to determine if a mutual fund is regular or direct. Look for the ‘Advisor’ field in your CAS. If it’s a regular plan, you’ll see ‘ARN’ followed by a number in this field.
