Easy and quick access to the markets has inspired several investors to take charge of their investment decisions. What’s more, the growth of online investment platforms has permitted investors to buy and sell mutual fund units without any need for human interaction. However, DIY (do it yourself) investors were still skeptical to pay brokers or agents for services they didn’t need. Considering the interest of these investors, the Indian markets’ regulators and controller – SEBI (Securities and Exchange Board of India) announced that mutual funds should have two flavours, namely, regular plan and direct plan. This article aims to serve as a mutual fund investment guide in understanding the differences between direct and regular funds and choosing the right fund for their investment portfolio.
What are direct funds?
Direct funds are those mutual funds that are provided directly by the fund house or the AMC (asset management company), with no third party, distributor, broker or agent to facilitate their mutual fund transactions. As a result, investors do not have to pay any commission or distribution fees involved in these transactions. This decreases the expense ratio of these mutual funds. Thus, direct funds are ideal for those investors who wish to invest in mutual funds on their own via direct plans.
What are regular funds?
Regular funds are those mutual funds that are traded via an agent, advisor, mutual fund broker, or distributor. As investors do not have to tackle the AMC directly, investors have to pay a commission or brokerage charges. However, they do not directly pay to the facilitator. Instead, the fund house adds these brokerage charges to the expense ratio of the scheme. This is the reason why the expense ratio for regular mutual funds is slightly on the higher side than direct funds.
Regular vs Direct
The following tables summarises the differences between regular vs direct funds
|Parameter||Direct funds||Regular funds|
|Involvement of third party||No||Yes|
|Returns||More as the expense ratio is less||Less due to the involvement of commission fee|
|Market research and analysis||Done by the investor||Done by the agent|
|Convenience||Less as an investor has to take all investment decisions on their own||More as the agent does all the work|
|Ideal for?||Market savvy investors who wish to manage and control their own investments||Investors who are new to the investing world or those do not have the time and efforts to research about the market|
Both direct funds and regular funds are accompanied by their own sets of hits and misses. If you have the desired time and knowledge required to invest in mutual funds on your own, you might as well consider investing in direct funds, and saving on your direct expenses. If not, then find a good agent or broker who will be investing in mutual funds on your behalf and choose a mutual fund according to your portfolio. Happy investing!