Many people may find it challenging or intimidating to understand mutual funds. We'll try to explain everything to you in the simplest terms possible. A mutual fund is essentially a collection of money that many different people have contributed (or investors). This fund is managed by a qualified fund manager.
It is a trust that collects money from a number of participants with the aim of investing it together. The funds are subsequently invested in securities such as stocks, bonds, money market products, and/or other investments. Each investor has units, which represent a portion of the fund's holdings. The income/gains from this collective investment are divided proportionately among the investors by calculating a scheme's "Net Asset Value," or NAV, after deducting specified expenses.
Simply put, a mutual fund is one of the best investment options for the average investor since it enables them to invest in a diversified, expertly managed basket of securities at a fair price.
There are two plans in every mutual fund scheme: Direct and Regular plans.
Regular Plans
Regular plans are purchased from distributors of mutual funds. The mutual fund distributor offers services such as advising investors on which mutual scheme to invest in, submitting investor Know Your Client (KYC) documents to the Registrars and Transfer Agents (RTAs) or AMCs, assisting investors with the investment process (such as submitting application forms, cheques, etc. to the RTAs/AMCs), and ongoing services (e.g., generating account statements, redemption requests etc). As long as you continue to invest in the regular mutual fund schemes, the distributors will get commissions from the AMC in exchange for these services. These commissions are added to the TER of regular plans by the AMC. Because of this, regular plans have larger TERs than direct plans.
Direct Plans
Direct plans are purchased directly from the AMC; there is no intermediary. By visiting the AMC website, your local AMC, or the registrar's office, you can invest in direct plans online. You can also consult your SEBI Registered Investment Advisor to get direct plan and help you choose the best suitable fund. One thing to note here is RIA would act in the best interest for you unlike MF distributors where the common intent is more commission.
Distributor's commissions are not incurred by the asset management business because mutual fund distributors are not involved in direct plan investments. As a result, direct mutual fund TERs are lower when compared to regular mutual fund TERs.
Moreover, if you have a good understanding of the financial markets, the various types of mutual fund schemes available, how to compare scheme performance, investment objectives, risk factors, and fund portfolios, and which type of fund is best suited for your financial goals, you too can enjoy investing in a Direct Plan. This is due to the fact that you will be saving money on commission.
When comparing direct mutual funds to regular mutual funds, there are three major distinctions that are all interconnected: the method of acquisition, the price (NAV), and the ongoing cost (total expense ratio). Each approach has advantages over the other. Investors should be aware of how the cost structures of these two plans differ, how that differs from the returns they can expect, and use that knowledge to decide whether to invest in Direct or Regular mutual fund programmes.
Total Expense Ratio: The mutual fund business charges the investor a fee known as the total expense ratio (TER) to cover the ongoing operating costs spent in servicing the investment. TER is deducted proportionately from the scheme's assets and factored into the unit's price or Net Asset Value (NAV). Management fees, registrar fees, trustee fees, marketing expenditures, and distribution costs are all included in TER. The compensation paid to the financial advisors and mutual fund distributors who act as a middleman between the investor and the asset management company (AMC) is known as the "distribution cost." One of the most crucial factors to consider when comparing a direct plan to a regular plan is TER.
NAV: The TER of any mutual fund plan is adjusted from the NAV, or net asset value. The NAVs of direct plans are higher than those of regular plans because the TERs of regular plans are higher than those of direct plans. In other words, a direct plan will always have a larger investment value than a regular plan once you have completed your purchase.
Returns: The TER differences between direct plans and regular plans might be anywhere between 0.5% and 1%. The returns of regular and direct plans are directly impacted by this. The direct plan will provide a 1% higher CAGR return than the regular plan if the TER of the direct plan is 0.75 percent higher than that of the regular plan. If you compare the results of mutual fund direct vs. regular plans over a long investment horizon, the direct plans can add up to a significant difference in returns on your investment.
Parameter | Regular Plan | Direct Plan |
Intermediatery | Yes | No (self) and Yes (RIA) |
Returns | Lower | Higher |
Total Expense Ratio | Higher | Lower (No additional fees to Broker) |
NAV Purchase | At a higher rate | At a lower rate |
Research for Funds | MF Distributor | Self and RIA |
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