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What is a Direct and Regular Mutual Fund?

Most people have heard about mutual funds but only a relatively small number of people know that there are different types of mutual fund plans available. That’s why a vast majority of investors buy regular mutual funds instead of direct mutual funds.

Both plans have unique advantages, so investors should know about them before investing in mutual funds online. In this article, we will discuss what is direct and regular plan in mutual fund in detail. Let us start with a regular mutual fund plan.

What Is a Regular and Direct Mutual Fund Plan?

Regular plans are the ones in which intermediaries are involved. These intermediaries are essentially the middlemen like distributors or brokers who are authorized to give you access to mutual funds

Intermediaries can help investors in making decisions to identify the fund that suits them the best, counsel about the investment market, help with the investment process, and more. 

Moreover, they also submit all the paperwork to AMC (Asset Management Company) on behalf of their investor. In short, regular plans are the best-suited plans for individuals who want to invest their money in a mutual fund but don’t know much about it. 

The question is what distributors will get by selling these mutual funds or how they make money. The distributor receives a commission from the AMC for their services, obtained by charging a mutual fund load

The AMC further covers this expense by adding commission to the TER (Total Expense Ratio). TER is a fee the mutual fund company charges to provide services to their investors. 

It includes all the distribution costs, marketing costs, management fees, Registrar’s fees, and more. Since in the regular plan, TER consists of the commission of distributors, they are more expensive than direct funds.

On the other hand, as the name suggests, direct mutual funds are schemes that can be bought directly without the involvement of a middleman. Direct plans can be purchased either online or offline. 

To purchase it online, you must visit a mutual fund app, AMC’s site, or MF’s distributor site. The intermediaries and distributors play no active role and no commission is charged. Thus, the TER of direct mutual funds is lower. 

How to Choose Between Direct and Regular Mutual Fund Plans?

Both regular and direct mutual funds have their unique pros and cons. Investors should choose one based on their preferences and suitability.

1. Returns 

Most investors invest in mutual funds because of the higher return and profit. The very thing that helps investors to choose between regular and direct mutual fund plans is a return on the investment. 

Compared to regular mutual fund plans, direct plans offer higher returns. The reason is that these plans don’t involve intermediaries and have a lower expense ratio.

2. Net Asset Value 

NAV is the value of one unit of a mutual fund, and it is generally calculated by dividing the total asset owned by the number of units. Mutual funds invest funds in various financial assets such as market shares, bonds, debentures, and more. 

Further, NAV also comprises the fees given to the intermediaries and distributors, which makes the NAV lower. However, in direct mutual fund plans, NAV’s value is higher than in regular plans because the cost paid to agents is not included.

3. Control 

The third thing which helps investors choose between direct and regular mutual funds is the control over their investment. Since no parties are involved to influence decisions, investors are free to choose mutual funds based on their investment goals.

If you are someone who likes to conduct your own market research, has knowledge of mutual funds, and can find suitable mutual funds by yourself, you can choose a direct plan. 

On the other hand, if you prefer having expert guidance, you can go for a regular plan. However, it is necessary to have proper knowledge about the schemes and funds you are investing in. 

4. Expense Ratio

Another factor that helps investors choose between regular and direct plans is the expense ratio. Direct plans have a substantially low expense ratio compared to regular plans due to the clear lack of middlemen. 

Conclusion

Direct plans are for individuals who wish to avoid dealing with intermediaries. Here, investors can buy units directly from a mutual fund platform or the mutual fund company.

Whereas in a regular plan, investors pay a commission to intermediaries. Now you have the answer to the question: what is direct and regular plan in a mutual fund?

Like with any financial investment, it is necessary to have proper knowledge about both plans before dipping your toes into either of them.

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Sudhanshu Chandak

Bringing you deep market insights each week by connecting the dots of finance.

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