Direct Vs. Regular Mutual Funds: Know the Difference

10 Nov 2020  Read 455 Views

If one decides to visit a museum of modern art without having any prior knowledge of the subject, what is the best option that one can carry out impromptu? Hire a museum guide. By doing so, not only would one save a lot of time but would also require a little or no preparation/research for spending a day relaxing and admiring those art pieces.

Contrary to this, the individual can just do some reading before going to the museum to save money, at the expense of his time. Both the options are easy to carry out with the mere difference of having the resource to hire a guide or not. 

The same thing happens in mutual funds. Mutual funds offer two plans to investors; the 'Regular Plan' and the 'Direct Plan'; wherein one option, investors can simply pay an amount or an agent's fee so he can do the research work and suggest a plan to the investor, and in another, investors can do all the research work on their own and save money.

Let's take you through these plans and see what they offer.

Regular Plan or Regular Mutual Fund

In this fund scheme, investors make investments through agents or distributors. Here, the agents get paid from the AMC (Asset Management Company) to bring the investors to them, and the fund manager adds this fee as an expense ratio in investor's investments. That expense ratio makes this fund scheme slightly expensive compared to the other schemes.

The regular fund schemes may be ideal for those investors who do not have any prior knowledge of the field or for those investors who do not have time to research about the funds and wish to avoid the heavy time-consuming process of debating the pros and cons of one fund plan.

Before the internet era, investors used to pay a brokerage fee to the agents who used to do heavy paperwork to purchase the funds on behalf of them. In the modern era, everything can be done online, but those investors who do not have any prior knowledge of the field still pay a brokerage fee to the agents to select mutual funds for them that meet their financial goals and agents select the funds on the investor's behalf.

Characteristics of the Regular Mutual Fund

  • This fund scheme is ideal for those investors who have no prior knowledge of the industry.
  • Agents/distributors help investors to select the funds that can meet their financial goals and risk tolerance as agents/distributors have deep knowledge and experience in the industry.
  • Distributors keep track of the investor's portfolio as it becomes hectic for the investors to keep track of their portfolio regularly. That is the reason the agents/distributors charge a higher expense ratio.
  • This fund scheme is investment-friendly as the distributors/agents keep track and facilitate your investments. 

Direct Plan or Direct Mutual Fund

As the name suggests, the 'Direct Plan' fund scheme is directly offered by the AMC(Asset Management Company). There is no middleman or third party agent between the investors and AMC to make the investments. Investors directly contact the AMC for the investments. 

This fund scheme charges a lower expense ratio than the regular mutual fund schemes as there is no third-party involvement in the investment. Due to this, there is no brokerage fee or commission, which further reduces the expense ratio of the investment.

Investors can choose the SIP(Systematic Investment Plan) or lump-sum to invest in the direct mutual fund scheme without paying a heavy third party's charge as investors are directly dealing with the fund manager. 

This fund scheme might be ideal for those investors who have prior knowledge of the field as there are no agents in between the investors and AMC. This means that in this mutual fund scheme, the investors would have to select the fund and do the market research on their own, according to their financial goals and risk tolerance.

Characteristics of Direct Mutual Fund

  • To make investments, investors do not depend on the third party agent and directly deal with the AMC.
  • This fund scheme offers investments in both online and offline modes. 
  • It charges a lower expense ratio as there is no third party involvement to make investments.
  • This fund scheme offers good returns in a long period of investments. 
  • This fund scheme keeps the investor's portfolio diversified to avoid possible risks.
  • The AMC hires the best advisor to invest the investor's money to offer them a higher return with minimal risks.

Difference between Regular and Direct Mutual Fund

In the regular funds, the commission is paid to the agents who bring the investors to the AMC. And that commission is between 1% to 1.25% a year. 

The NAV (Net Asset Value) of the investor's fund adjusts accordingly whereas, in the case of direct funds, the AMC does not need to pay any commissions to the agents as there is no third party involvement between itself and the investors.

In regular mutual funds, agents understand the risk and financial goals of the investors and select the funds accordingly. These agents save a lot of time for the investors to select the right fund for them.

The key difference between the regular and direct mutual fund is the expense ratio/commission/brokerage fee.

Here are some other differences between the direct and regular mutual fund plan.

Parameters

Direct Mutual Fund Plan

Regular Mutual Fund Plan

Expense Ratio

Lower expense ratio as there is no third party involvement between the investors and AMC.

Slightly Higher as there are agents/intermediates between the investors and AMC.

Advice/guidance from the Expert

There is no guidance in this plan.

Agents advise the investors to select the right funds for them.

NAV of the Fund

Higher NAV due to lower expense ratio.

Lower NAV

Research of the market

Investors have to research on their own in this plan.

Agents do all the research and guide the investors according as per their financial goals.

Convenient

Less convenient as an investor does not have any prior knowledge

More convenient as agents guide the investors.

Returns

Higher returns as the expense ratio is low

Slightly lower returns than direct plan as there is a higher expense ratio

Final Thoughts

There are always two ways of doing things; one way is to do all the work on your own which can be time-consuming but can save a lot of money, and the other way is to simply ask someone else to do that on your behalf by paying them some amount of money.

A regular plan might be ideal for investors who have no prior knowledge or idea about investing, as here, the agents guide the investors to select the right fund according to their financial goals and their risk tolerance.

On the other hand, a direct plan might be ideal for those who have knowledge of the industry and can select an ideal fund scheme on their own and track their portfolios.

In the end, as it is always advised, selecting the right mutual fund scheme to invest in, be it a regular or direct plan, should depend on the financial goals of the investors and their risk tolerance.

About the Author: Divyanshu kumar | 29 Post(s)

Divyanshu is currently pursuing a Master's degree in Financial economics. Growing up, he has always been interested in codes and numbers which he has gradually learnt to express in words too.

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