There are two ways to invest in mutual funds for anyone seeking capital appreciation through investment in market linked schemes. Investors generally have the option of going with the regular plan or the direct plan. A direct plan is a mutual fund plan where an investor may directly purchase from the mutual fund house. On the other hand, investors can purchase a regular mutual fund plan through an aggregator/broker/advisory. The mutual fund house generally pays a particular commission fee depending on the number of investors they receive through regular mutual fund plan investments.
To put it in lay man’s terms, a direct mutual fund plan generally carries a low expense ratio whereas the expense ratio for owning a regular mutual fund plan is slightly higher.
Before we move on to discuss direct and regular mutual fund plans in detail, let us first understand what mutual funds are and how they work.
What is a mutual fund?
A mutual fund is a financial investment tool made out of a pool of funds collected from investors sharing a common investment objective. Mutual funds are professionally managed funds that invest in multiple asset classes, carrying a diversified portfolio. What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. The money is invested depending on the investment objective and risk profile of the scheme in various money market instruments like equity, call money, treasury bills, certificate of deposits, corporate bonds, government securities, etc.
Mutual fund investors receive mutual fund units in quantum with the investment amount and depending on the fund’s existing NAV. It is believed that the performance of a mutual fund depends on the performance of its underlying assets.
What is a direct mutual fund plan?
A direct mutual fund plan is typically a mutual fund scheme offered directly by the fund house / asset management company. In a direct mutual fund plan, there are no third party involvements and hence the fund house doesn’t need to pay and distribute commission fees to a third party for example, an aggregator, a distributor or a broker for that matter. And this is exactly why, the expense ratio of owning a mutual fund with a direct plan is generally on the lower side. One may buy a direct mutual fund plan by visiting the fund’s website online or by manually visiting the fund house.
Those seeking investment in a direct mutual fund plan shall identify the plan with the word ‘direct’ mentioned in the product name.
For example: Axis Long Term Equity Fund – Direct Plan
What is a regular mutual fund plan?
Regular mutual fund plans on the other hand are those mutual fund schemes that retail investors can purchase through an aggregator. An investor doesn’t have to visit the fund house personally to buy their mutual fund product. He/she can do the same by buying a regular mutual fund plan through intermediaries like distributors, advisors, or brokers.
The third party generally levies a commission/distribution fee on the fund house for selling the mutual fund on their behalf. This fee is usually recovered by the fund house by adjusting it at the expense. Those who have researched multiple mutual fund products may have noticed that the expense ratio for owning a regular mutual fund is slightly higher than a direct mutual fund. Hence the returns tend to be a little higher for direct plans. Individuals who are completely new to mutual fund investing may go with the regular plan.
Difference between direct and regular mutual fund plans
Here are some of the things that distinguish a direct mutual fund plan from a regular plan
||Direct mutual fund plans
||Regular mutual funds|
||Slightly lesser than regular plans||Higher than direct mutual funds|
||No commission as one invests directly through the fund house||As levied by the distributor|
|Capital appreciation||Since there are no capital charges involved one may receive decent capital apperception||Capital appreciation may get affected by the higher expense ratio levied on the investors|
|Who may consider investing
||Those with market awareness and decent mutual fund investing knowledge||Those who are entirely new to investing and do not have the time to evaluate their portfolio regularly|
We hope the above differences between the two mutual fund plans help investors make an informed investment decision. Those who feel that they need further assistance, they might seek the help of a mutual fund consultant. After all it is your hard earned money that you are investing, and you deserve to achieve your ultimate financial goal.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.