Direct or Regular Mutual Fund: What Should you Choose?

As an experienced investor, you may have observed an odd option when registering for mutual funds: You must choose between a direct plan and the regular plan. Mutual funds must now categorize the same fund plan into two distinct categories: Direct Plans and Regular Plans, beginning of January 2013.

During the announcement of daily NAVs, SEBI requested all mutual funds to clearly differentiate between regular plans and direct plans. This is the first time the two have been clearly separated. In other words, what's the difference between these two options, and why do we have to choose only one?

Let’s begin with analyzing these investment options so you can better decide what choice is right for you.

Difference Between Direct & Regular Mutual Funds

Direct and Regular plans are the two types of mutual fund investments available to investors. Comparing direct mutual funds with conventional mutual funds reveals three major differences, all of which are interconnected: how you buy, what to buy, what you pay (NAV), and how much it costs over time (total expense ratio).

There are advantages to both strategies. Investors should be aware of how the cost structure differs between the Direct and Regular mutual fund plans and how it impacts their returns before making an educated investment choice.

What are Direct Mutual Funds?

You may complete the KYC and invest directly in the fund of your choosing on their website by providing the appropriate documentation. Once you've made a decision on a strategy, you may begin investing right away. You save money since they don't charge commission or distribution fees this way, which means you can keep more of your earnings.

However, this route has a significant drawback: you'll be forced to do your own study to determine which MF would best serve your objectives before you can make an educated choice. As a result, if you're not familiar with MFs, you may not be able to choose the best one.

What are Regular Mutual Funds?

If you choose the normal plan, an agent/intermediary will do your job on your behalf. In this case, you will get a lot of assistance and someone will walk you through the whole procedure. All you have to do is provide your needs and the required documentation, and the rest of the procedural work will be taken care of for you.

So, you'll not only learn about the best MFs to invest in, but you'll also save time by not having to go through every choice on your own. Additionally, you will be given a representative who will keep you up to speed on the status of your fund and any new funds or investment opportunities in which you may be interested.

What Should you Choose: Direct or Regular?

A mutual fund scheme's Direct and Regular plans are just two variants of the same overall product. Both funds are invested in the same equities and bonds and are managed by the same fund manager.

In contrast to direct funds, which do not charge a commission to the broker as transaction fees or distribution expenses, the AMC charges a commission to brokers for regular funds. This is due to the fact that there are no middlemen when investing via a direct plan, thus all related expenses are removed.

If you compare the NAV of the direct plan to that of a normal plan, the direct plan posts higher numbers. Does it imply that investors would be better off going with a direct plan? If you're thinking about investing, don't only focus on net asset value (NAV).

Some additional things to consider are your knowledge and ability to manage your portfolio, such as if you know enough to select an appropriate fund for your needs. To avoid this, consult with a financial adviser who handles all of this on your behalf at a low fee.

As a result of the adviser monitoring and rebalancing of the portfolio to produce better returns, the total returns in regular funds would be higher despite the increased costs.

Who Should Invest in Direct Mutual Funds?

Direct plans are a good option for investors who want to deal with specific fund houses rather than go via an intermediary. These are best suited for individuals who have the time and inclination to do their own research on mutual funds before investing.

It is the investor's responsibility to handle all aspects of the application and compliance procedure from start to finish. Direct funds may be an excellent option for investors who wish to boost their returns while also cutting their expense ratios.

Conclusion

In this post, we've compared direct mutual fund plans to traditional mutual fund plans, as well as explained the major differences between them. When compared to regular plans, direct plans are less expensive and provide better returns.

In fact, the difference in returns may be significant if you invest for a lengthy period of time. However, Direct mutual fund plans require prior investing expertise and understanding. If you make poor investment choices, you run the risk of losing money.