It took a lot of days and online research to get a brief idea on all the popular types of mutual fund schemes. Just when you thought you are getting better; you were introduced to something you’ve never heard before- Direct Funds. What are they? Are they also a type of mutual fund category? Read this post to find out.
Starting your mutual fund investment on your own is never easy. It takes a lot of time first to understand all the different kinds of mutual fund schemes and then match them with your investment objectives.
When you start believing you’re better at understanding mutual funds, you stumble upon something you’ve never heard before. For instance, do you know what is direct mutual fund?
While you might have started understanding some of the popular types of mutual funds, like equity, debt, hybrid, ELSS, etc. there is a vast possibility that you might not have read anything about direct schemes.
What are these direct schemes? Are they also a type of mutual fund? Let us take a look-
Direct schemes are not a specific type of mutual fund, like equity, debt, or hybrid. No matter what type of mutual fund scheme you end up selecting, you will always get two options to invest- Direct or Regular.
A direct mutual fund is when you directly invest in a mutual fund scheme without any intermediary, like mutual fund distributor/agent or broker in between. In other words, you directly purchase the scheme units from the official website of the AMC or by visiting their branch office.
Similarly, a regular scheme is when you purchase mutual funds through a distributor/agent or broker. Irrespective of whether you invest in a direct scheme or a regular scheme, you will end up investing in the same mutual fund scheme.
Let us consider that you want to invest in ‘ABC’, which is an equity scheme, offered by a specific fund house. Now, the same ‘ABC’ scheme will have two investment options- Direct and Regular. No matter whether you invest in the Direct scheme without any intermediary or in the Regular scheme through an intermediary, you will be investing in the same scheme with the same portfolio.
So, what is the difference between the direct plan and the regular plan? Take a look-
When there is an intermediary, like an agent or broker through whom you invest in a mutual fund scheme, the fund house needs to pay a specific commission to them. But the fund house doesn’t entirely pay this commission from their pockets. It is paid from the returns generated by that mutual fund scheme.
As a result, you will see that the Net Asset Value (NAV) of direct equity schemes is always higher than the regular option of the same schemes. This difference is primarily due to the commission that the fund house is required to pay in the case of regular schemes.
Here are some of the top benefits of investing in a direct plan-
Investor directly purchases the fund units from the fund house without any 3rd party involved
Direct schemes have lower expense ratio as compared to regular schemes, which helps the investor earn higher returns in the longer run
Option to invest online (through the website of the AMC) and offline (through the branch office of AMC)
So, why do people invest in regular schemes if direct mutual fund schemes can deliver higher returns? That is because investing in mutual funds is not as easy as it sounds.
After researching for weeks, you sure can relate to the fact that understanding all the different types of schemes, terminology, and knowing your investment profile is not an easy process. So, rather than trying to do this on their own, a lot of investors prefer regular schemes where they can rely on the expertise of a mutual fund agent or distributor.
The selection between the two depends on how experienced and knowledgeable you are and whether or not you can make an investment decision on your own. If you have some investment experience and believe that you can make the right investment decision yourself, go with the direct option.
If you are not sure about your investment objective or finding it difficult to understand the different types of schemes and what you should select, a regular plan can be an excellent option.
In most cases, even such new investors, rather than buying a regular plan from a mutual fund agent/distributor, rely on SEBI registered investment advisors to help them make the right decision. But note that such advisors charge a fee for their professional help. So, make your decision accordingly.