In 2012, the Securities and Exchange Board of India (SEBI) directed all mutual funds to introduce a direct mutual fund plan along with the regular plan. These are two options of the same scheme with the same investment portfolio, fund manager, and risk exposure. The only difference is that in a regular mutual fund, the fund house pays a commission to a broker or agent for distribution, but in a direct plan, you buy the fund directly from the fund house.

 

In this article, we will talk about the difference between direct and regular mutual funds to help you choose the perfect fund for your needs.

 

Direct & Regular Mutual Fund

The fundamental difference between a direct and regular mutual fund is that in regular funds, the commission/brokerage of the distribution partner is included in its expense ratio, whereas, in direct funds, there is no commission/brokerage applicable. Hence, the expense ratio of a regular fund is more than a direct fund. Here are the differences between direct and regular mutual funds.

 

• Expense Ratio
  
  The expense ratio of a mutual fund is the ratio of the cost of managing a fund to its revenues. In simple words, it is the percentage of the AUM that the fund house deducts to run and manage the scheme.
  
  This includes the costs associated with distributing the fund. In a direct mutual fund plan, there is no distribution cost since investors purchase these plans directly from the fund house. Therefore, the expense ratio of a direct plan is lower than a regular plan.
  
  
• Returns
  
  The fund house adjusts the expense ratio in the Net Asset Value of the scheme. Since a direct mutual fund has a less expense ratio than a regular fund, its NAV is slightly more too. Hence, investors buying a direct plan tend to earn better returns than those investing in a regular plan.
  
  
• Investment Advisory
  
  If you are new to the investment landscape or not conversant with the range of investment avenues available, then you might need assistance in choosing the right mutual fund schemes for your needs. This is where a reliable investment advisor steps in.
  
  Most advisors also act as mutual fund agents and recommend schemes that you can invest in based on your financial goals, risk tolerance, and investment horizon. However, you must ensure that you choose an advisor that offers unbiased investment recommendations.
  
  

Importance of Investments

 

Investments play a crucial role in ensuring a financially secure future. Here are the benefits of investments:

• Investments can be a good source of passive income and help you tide over financial exigencies with relative ease
• They can help ensure financial independence when you are older. You can also buy a Tata AIA policy offering life insurance at an affordable rate to ensure financial security for your loved ones after you are gone. Make sure that you go through the life insurance details to ensure optimum protection for your family.
• Inflation can erode the purchasing power of money over time. Investing in instruments that offer returns are more than the rate of inflation can help prevent the erosion of the value of money you hold.
• Investments can also help you reduce your tax* liability. For example, when you buy a Tata AIA policy, you get tax* deduction benefits under Section 80C of the Income Tax* Act 1961.
  
  

Mutual funds are a great investment option for people looking to invest in a basket of securities managed by a professional fund. There are hundreds of schemes designed to cater to the varying needs of investors. Before you buy a fund, make sure that you create an investment plan by factoring in your financial goals, investment horizon, and risk tolerance. Also, choose between a regular and direct mutual fund carefully.

Conclusion

All mutual fund schemes are available in two variants – direct and regular. The difference between these schemes is the commission paid to brokers or agents for distributing the units of the scheme. This impacts the expense ratio and the returns of the scheme. If you are looking for investment advice, then make sure that you take recommendations about schemes based on your needs from the advisor.

L&C/Advt/2022/Sep/2242