Mutual funds are governed by the Securities and Exchange Board of India (SEBI) which continuously makes changes in the funds so that the funds can adapt to market changes. One such change was made by SEBI in 2012 which involved the introduction of direct plans in mutual funds. Thereafter, from 1st January 2013, mutual funds were offered in two variants – regular plans and direct plans. Though both these plans are the same, have the same fund managers and the same investment portfolio, there are some intrinsic differences between the two. Let’s understand that:
Regular plans of mutual funds are those plans which are sold by mutual fund brokers, distributors or intermediaries. As such, these plans include the commission payable to the intermediaries in their expense structure. This commission element increases the total expense ratio of the fund.
Direct plans are those which you buy directly from the mutual fund house. No intermediary is involved in the sale. You invest in these plans online directly from the mutual fund house’s website or from the website of mutual fund registrars like CAMS, Karvy, etc. Since there are no intermediaries involved, their commission doesn’t feature in the expense ratio.
There are distinct differences between regular mutual fund plans and direct plans which are as follows –
The returns provided by direct mutual funds are higher than those provided by regular funds. Though the difference is marginal, over the long run, this difference causes a considerable gap in the returns of both these funds. Let’s take an example
INR 5000 is invested monthly in a regular and direct plan. Here’s what the returns would look like after 15 years –
|Direct plan||Regular plan|
|Assumed annual rate of return||12.75%||12%|
|Monthly investment||INR 5000||INR 5000|
|Period of investment||180 months||180 months|
|Amount after 15 years||INR 26.83 lakhs approx.||INR 24.97 lakhs|
The amount is affected quite substantially even with a marginal difference in the interest rate. This is because of the compounding of the marginal interest over the long tenure. So, given the illustration, direct mutual funds are a better bet over regular ones.
However, only the return factor should not be judged when comparing direct and regular mutual fund plans. Regular plans are also beneficial because of the following reasons –
Direct plans are better if you are a seasoned investor and need no guidance in buying and managing your investments. If, however, you are not very conversant with the mutual fund segment and need advice, go for regular plans. Make a choice as per your suitability and not only by the difference in the returns generated.
Individual investors engage in stock market activity for a variety of reasons, e.g., long-term gains, short-term gratification, experiencing daily highs/lows, learning, applying intellectual strategies, etc. Their approaches to achieving these objectives can be broadly classified as active or passive in terms of the time spent analyzing the markets and their frequency of transactions. Let’s understand […]
7 Common Investing Mistakes That Can Reduce Your Returns from the Market Investing is an exciting experience. But it can also overwhelm people, especially those who are starting afresh. By their very nature, stock markets go up and down – disciplined investors understand this, and develop strategies to reduce their risks during market lows (as […]