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direct or regular mutual funds

Direct or Regular mutual fund – which is better?

Do you invest in mutual funds? If yes, how do you invest? Do you opt for a direct or regular mutual fund?

Invest in direct mutual funds, they are easier and your return would be higher than the regular mutual fund plan.

Do you hear this, from your friend, relative or office colleague??? There is a high probability the answer is YES.

Did you ever try to find out whether the facts hold true? Of the direct or regular mutual fund, which one is better?

Did you try to find out how much difference between direct and regular mutual fund is?

First thing First

Do you actually know how the two different schemes work? There are many other questions that must be answered to make a wise decision.

In this article, I will try to decode this question which seems to be difficult.

I will also try to make the above-mentioned question easy, so that when next time you come across some term like this you would be able to answer and take decisions like a pro.

Difference between Direct or Regular Mutual Plan

direct or regular mutual fund

In 2012 SEBI (Security exchange board of India) introduced a number of financial reforms, direct mutual fund investment was one of them. From January 2013 this came into effect and since then every mutual fund has two options – Regular and Direct.

A regular plan is a traditional way of doing investment in a mutual fund, in which there would be an advisor who would help you in completing KYC (if you are first time investor) suggest your mutual fund to invest based on your goals and also educate you about mutual fund trends.

He is also responsible for sending monthly or quarterly report as to fund performance, also suggest if you should move out or move in, in any of the mutual funds.

On the contrary in a direct plan, you would act as your own consultant, you have to do all the research, investment, downloading of statements, keep a track, and also redemption.

The difference between two schemes is that a commission or advisory fees which a fund house pays to the advisor in regular but not in the direct plan. This commission is not charged when you are investing in the direct fund and gets compensated to you in the form of less deduction from your investment since you are acting as your own consultant and advisor.

ParameterDirect PlanRegular Plan
Third Party ( Advisor / Consultant)Not Present , Everything need to be done by the investorPresent
ReturnsHigh (no additional fees to broker/agent)Low, As consultant need to be compensated
Expense RatioLow expense ratio (As financial consultant is  not there)High expense ratio
NAVHigh, because of low expense ratioLow
Market ResearchEverything need to be done by InvestorAdvisor support in all functions
Investment AdviceNot AvailableProvided by advisor

Why You Invest In Mutual Fund

Before deciding which is a better, direct, or regular mutual fund, it very important to answer why you have been investing in mutual funds.

Yes, one reason could be tax saving (when you invest in ELSS) other and more popular could be for various lifestyle goals.

Goals that might be short term, medium-term, or long term. You invest in mutual so that your small monthly saving would translate into a big sum when you reach near your goal.

A mutual fund is the best way to create long term wealth by investing small amounts regularly.

You invest in child marriage, education, and retirement. All these goals are pretty long and all through this, you need to be invested and being guided.

Though there are mutual funds for the short term and the medium term also.

Benefit of Regular Mutual fund over Direct mutual fund

benefit of regular mutual funds

When you have to make a choice between direct and regular mutual funds, it’s not only money that matters. You need to look for the host of services which the financial consultant is going to offer you.

If you are adept enough to keep a track of the market on a regular basis and can service your MF then definitely you should go for the direct mutual option. In case you fall in bracket where it’s difficult for you to keep a track of mutual funds and service, you should opt for regular Mutual fund.

The service of financial consultants would be worth much more than the difference in expense ratio.

A financial consultant is a bridge between you, fund house, and your goals. A financial consultant gets a commission for the varied services which he provides you.

Some of the services which are provided by the financial consultants are:

1.Research

Research is the most important in mutual fund investment, a selection of mutual cannot be done before proper research.

The consultant is responsible to select the right mutual fund from 100’s of funds which just matches your risk appetite, time horizon, and other parameters.

Funds that are good today not necessarily going to be good forever, so you need to churn your portfolio, at least yearly.  You need to be sure that the fund which is there in the portfolio matches your requirement.

If that is not matching no matter how good it may be, it would fail to achieve the goals.

For example, if you need to build a portfolio for short term goals like buying a car, in this you cannot have mid-cap or small-cap.

Though these funds have given excellent returns, that’s’ in the long run. Chances of missing the goal would be much high in the short term owing to the high risk in the funds.

2.Goal Planning

goal setting

When a consultant charges a commission for the services he provides you, it’s not restricted to just form filling and collecting documents but much beyond that.

The consultant understands that it’s a long term investment and setting goals are important.

He would force you to pen down your SMART goals, so whatever you had in mind those goals would be in black and white. He would also suggest which mutual fund should be best for which goal.

Since he is visiting you on a regular basis he is in a much better position to understand your needs, requirement, attitude towards risk, etc.

Its said, “ two minds are better than one”.

3.Motivation

motivation

A financial consultant generally visits you twice every year, or whenever there is some major change in portfolio.

He shall keep you posted about how close you have reached your set goal, thereby keep you motivated to invest in your goals.

This exercise is very important as it has been found that once the investment gets broken, it’s extremely difficult to build it again. So you need constant push and motivation for that. It gets completely eliminated when you opt for a Direct mutual fund option.

4.Regular update

A financial consultant is responsible for giving you regular updates on the performance of portfolio and market scenario.

The consultant would give you monthly and quarterly report so that you can keep a track of your investment and portfolio. This helps you to keep yourself updated and informed.

5.Value Added services

value added services

There are a number of times when you need to get some of your details updated like a signature, bank account, address, redemption, etc. In that case, you need to visit the fund house or CAMS to have the same request submitted.

Though with technology most of the task can be done by the application, still there are certain tasks which need a physical visit.

The financial consultant plays an important role by easing all these services.

Example

Now let’s try to understand with a past trend what kind of difference is there in case if you have opted for a direct or regular investment option.

For this we are assuming that from April 2014 you have taken SIP of 5000 in three different funds for five years, these funds are HDFC Equity Fund, Birla sun life Liquid fund, and HDFC balanced fund.

All funds belong to different classes i.e Equity, liquid, and balanced. Now let’s see what kind of wealth is created in 5 years under both options.

Particulars/SchemesHDFC Equity FundAditya Birla Sun Life Liquid FundHDFC Balanced Advantage Fund
Mr. X (Regular plan)Rs. 4,00,335Rs. 3,63,967Rs. 4,05,544
Mr. Y (Direct plan)Rs. 4,10,115Rs. 3,64,837Rs. 4,14,396
DifferenceRs. 9,780Rs. 870Rs. 8,852

It’s very much clear from the fact that their hardly any difference in the return between the two. This is a case wherein we remain invested in the same fund, there are high chances that had we switched between the funds after research the return would have been higher if not less.

Conclusion

Regular or direct mutual fund, which is better, isn’t the question here. The question is what suits you.

If you are an investment savvy investor who has the market knowledge, expertise, and time to arrive at the best mutual fund to invest, a direct mutual fund is best.

While most investors require investment assistance. Those who seek such advice can invest in the best funds recommended by their financial consultant. This would be a regular plan. 

Now you need to answer – are you ready to invest your energy and time to save those 9000 rupees or you invest that time in your prime job.

Think Decide & Invest.

You may be interested in reading

Top 25 Myths about Mutual Funds

All about mutual fund – A detailed study

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