A Direct plan is what you buy directly from the mutual fund company (usually from their own website). Whereas a Regular plan is what you buy through an advisor, broker, or distributor (intermediary). In a regular plan, the mutual fund company pays a commission to the intermediary. This is then recovered as an expense from the plan. In mutual funds speak, the expense ratio is higher for a regular plan. Read along to understand Regular Vs Direct Mutual Funds in detail.
Direct Mutual Fund is the type of mutual fund that is directly offered by the AMC or fund house. In other words, there is no involvement of third party agents – brokers or distributors. Since there are no third party agents involved, there are no commissions and brokerage. Hence the expense ratio of a direct mutual fund is lower. Thus, the return is higher due to a lower expense ratio. The direct plan of a mutual fund can be easily identified; the word ‘Direct’ is prefixed in the name of the fund. These mutual funds can be bought through either online or offline mode.
Regular plans are those mutual fund plans that are bought through an intermediary. These intermediaries can be brokers, advisors, or distributors. The intermediaries charge the fund house a certain fee for selling their mutual funds. The AMCs usually recover this fee through expense ratio. The expense ratio for regular mutual funds is slightly higher than direct mutual funds. Hence the returns tend to be a little higher for direct plans. A regular plan best suits investors who do not have the knowledge about the market nor the time to monitor their portfolio. Therefore, a regular plan is far more convenient for investors who aren’t well informed about the market. They receive expert advice at a nominal fee.
In 2012, SEBI introduced the direct plans in Mutual Funds. This was to enable investors to buy mutual funds without any intermediary in between. Both the options – direct plan and regular plan are managed by the same mutual fund manager. They invest in the same assets as well. However, the major difference is that in a regular plan, the fund house pays commission as a distribution fee. While in the direct plan, there is no such commission or fee. Below is the table showing the major differences for regular vs direct mutual fund.
|Parameter||Direct Plan||Regular Plan|
|Returns||High (no additional fees to broker/agent)||Low|
|Expense Ratio||Low expense ratio (no additional fees to broker/agent)||High expense ratio|
|Market Research||Done by Self||Done by advisor|
|Investment Advice||Not Available||Provided by advisor|
From the above Regular vs Direct mutual funds comparison, regular mutual funds are best suited for investors who seek financial advice. Even though regular plans seem costly when compared to direct mutual funds. The small percentage of the additional cost is worth the right investment decision. Therefore, compared to an uninformed wrong decision, well-researched advice can earn higher value.
While regular mutual funds have a slightly higher expense ratio and marginally lower returns, they have quite a few advantages.
Investing in a mutual fund isn’t as easy as it looks. An investor has to assess his profile on the basis of risk and financial needs. Then find the mutual fund that fits into this criteria. And finally, invest in the mutual fund. All this is a time taking process. An intermediary will have knowledge of the existing mutual funds. And will help find the best fit based on investors’ profiles. On the other hand, the direct plan lacks this. As a result, investing in a regular plan is convenient.
Intermediaries have in-depth knowledge of the huge array of mutual funds. Hence can assess an investor’s profile to find the best fit for them. A qualified advisor can guide the investors during their investment journey and even impart market knowledge to them to earn higher returns. So, only a regular plan has the option for professional advice. However, in a direct plan, the investor has to rely on his own knowledge.
Markets are dynamic and ever changing. As an investor, it would be hard to keep up with the market regularly. In a regular plan, intermediaries keep track of the market and monitor their client’s portfolios regularly. Also as needed, they advise on restructuring it. Investors opting for a direct plan have to take time out to monitor their portfolio regularly.
Intermediaries provide a few additional services for investors’ convenience. Such as keeping a record of investor’s investments, provide tax proofs during tax filing, facilitate redemptions, or etc. All these services aren’t available in direct plans. On the other hand, a regular plan comes with all these value added services.
Scripbox offers regular mutual funds investment via its online platform. It has a well-researched and tested algorithm that ranks mutual funds based on several parameters. It offers custom made portfolios for saving tax, for emergency purposes, and for building wealth. These portfolios are well researched and maximize returns for investors. Most importantly, Scripbox offers goal based investing so that investors can invest based on goals. One can either pick the goals that are already tailor made or build their own goal. Based on the goal and investor profile, Scripbox advises funds to achieve the goal.
Scripbox also offers a one stop solution for all mutual fund investment needs. Investing with it is easy and simple, and just a click away. They also make transacting with mutual funds and downloading the investment statements a stress-free task.
Regular vs direct mutual fund, which is better, isn’t the question here. Does it suit you or not? For an investment savvy investor who has the market knowledge, expertise, and time to arrive at the best mutual fund to invest, a direct mutual fund best suits him/her. Paying an advisor, the additional fee is not worth it as it doesn’t add any extra value. While most investors require investment assistance. For ones who seek such advice can invest in the best funds recommended by their advisor. The investment is then made in a regular plan. Scripbox is one such advisory platform. It provides its investors with an array of well-researched investment options.
Yes, investors can switch from a regular to a direct plan. But for most mutual funds, this is considered as redemption from the regular plan. The switch can happen online or offline. Online, it can be done by going to the fund houses’ website. And offline, it can happen at the nearest branch of the fund house.
NAV is the net asset value. The expense ratio is considered before the calculation of the NAV. Since direct plans have a lower expense ratio, the NAV for a direct plan tends to be higher.
Yes, the SIP amount can be increased in a mutual fund. All one has to do is start another SIP with an additional amount in the same mutual fund. When the ongoing SIP gets debited from your bank account, the additional SIP will also get debited.
However, there is another way. The investor can cancel the existing SIP in the mutual fund. And start a new SIP with the new amount and opt for SIP top-up. SIP top-up option allows investors to increase their investment in a mutual fund yearly with a certain amount.
Direct plans can be bought directly from the fund houses’ website. Or, by visiting the nearest branch of the fund house where you want to invest. Also, there are several online platforms that allow investors to invest in direct plans.
Regular plans are generally always better than direct plans due to the additional benefits one receives. The returns in direct plans can be slightly higher due to the lower expense ratio. But this cannot be the sole reason to choose direct plans. While, in regular plans, the investors get advisory services, portfolio monitoring services, and value-added services. For example, getting an account statement on demand. In a direct plan, all these services aren’t available.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.