Traditionally, investing in a mutual fund was done through a broker. This meant that the fund house would pay a commission to your broker, as a transaction fee or as distribution expenses, from your investment. However, in January 2013, the Securities and Exchange Board of India (SEBI) introduced the Direct Mutual Fund Plans. This made it mandatory for all Asset Management Companies (AMCs) to offer investors the option to invest in their mutual fund schemes directly, without any need for an agent, broker, or distributor. Since those reforms, there are now two ways to invest in a mutual fund scheme: through Regular Plans or Direct Plans. Regular Plans Regular plans are the conventional way to make mutual fund investments. They require an intermediary between you and the AMC. The AMC pays a commission to this intermediary, which is then recovered as an expense from your investment in the plan. Advantages of investing through a Regular Plan

  • If you find a large number of investment options overwhelming and find it hard to shortlist and finalize on the funds you want to invest in, Regular plans may work better for you. The expert guidance offered by your agent or broker would drastically reduce the time and effort needed to invest.
  • As an individual investor, you may not have the time and resources to track your investment and regularly monitor and review your portfolio returns. With a Regular plan, the broker or distributor reviews and monitors your returns as well as re-allocates your assets when required.
  • Regular plans are never just focused on selling you a mutual fund. They generally come as a package deal offering all the services necessary to simplify simplify your investments and keep your them healthy and up to date.

Disadvantages of investing through a Regular Plan

  • The commission deducted from your invest increases the expense ratio of Regular plans. This translates to considerably lower returns over the long-term as compared to the same investment made through a Direct plan.
  • The Net-Asset Value is lower in a Regular plan. If you are a long-time investor with a good understanding of the market and your investment style, then the amount you lose on commission does not make sense, and Direct plans may be a more natural option.

Direct plans Direct plans cut-out the intermediary and allow you to invest directly with the fund house. This means there is no commission deducted from your investment as transaction or distributions fees by the fund house. Advantages of investing through a Direct Plan

  • With Direct plans, investors can invest directly in a mutual fund scheme by simply visiting the AMC’s website and following the process they have outlined. This way, you avoid any ‘hidden fees’ added on by the intermediary that drain your returns without you even realising it.
  • Due to the lack of a commission, Direct plans have a lower expense ratio than Regular plans. This translates into a higher NAV for direct plans. In other words, you get higher returns on your investment in the long-term.
  • The digitisation of most documents and investment processes has made Direct plans a lot more accessible to the individual investor. You can easily find the right resources online to learn how to do it yourself and increase your returns.

Disadvantages of investing through a Direct Plan

  • Comparing and analysing mutual fund performance and comparing it with the investment strategy most suitable for you requires more effort and attention than the Regular plan. As an individual investor, you might not have the time necessary to regularly review and update your investment, which would adversely affect you returns.
  • The number of things to consider when investing in a mutual fund scheme, such as the age of the fund, reputation of the fund house, financial ratios and more require a professional understanding to get right. As new or first-time investors generally lack this market expertise.

Which plan works best for you? Ultimately, the plan that works best for you depends on your investment style. Though, if you are capable of doing the due diligence prior to investing in the scheme, then Direct plans work better for you. The lower expense ratio, owing to the lack of a commission, translates to higher returns in the long run. In a regular plan, however, there are chances that your returns end up being diminished owing to the fees and other expenses that you have to incur. However, there is no need to worry even if you’re not all that experienced and want to invest in a direct plan. The best way to go about it would be to get in touch with a certified financial planner or wealth management firm who can help you identify the best direct plans for you. This way, even though you may not have all the technical know-how, you still know that you are making an informed and safe financial decision. The best part is that the amount of money you will gain by investing in a direct plan will more than makeup for any fees that your financial advisor may charge for helping you choose your mutual funds.  

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