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The returns from fixed deposits are low unlike some years back when they used to be quite attractive. Investors are attracted to mutual funds for higher returns as they are aware that with the higher returns generated they would be able to meet their life goals. This has resulted in increased investments in mutual funds in India taking the total number of mutual fund folios(accounts) to 13.13 crore and assets under management(AUM) for the mutual fund industry at the end of April 2022 stood at Rs. 38,88,960 crore.
There are two types of investors in a mutual fund; the DIY (Do-it-yourself) and the others who depend on advisors; and there are two types of plans- the direct and the regular ones. A direct plan is the one that an investor buys directly from the mutual fund whereas a regular plan is the one in which the investor buys the mutual fund scheme with the help of the advisor, distributor, or broker. Both the plans have their own benefits and the investors should make an informed decision when investing in a direct or a regular plan.
Direct plans are bought from the AMC (Asset Management Company) and no broker or advisor is involved. A person can invest in direct plans by visiting the AMC website. As distributors are not involved the asset management company does not have to bear the distribution expenses (i.e. the commissions given to the distributors). This results in a lower expense ratio for direct plans.
The regular mutual fund plans are bought from brokers or mutual fund advisors. These people advise the investor on which scheme to invest in and often keep a track of their investments. The work done by the advisors is to help the investors in the investment process like submitting application forms, cheques, generating account statements, and redemption. The distributors receive a commission from the AMC for performing these services as long as the investor remains invested in a mutual fund scheme, which is based on the market value of the holdings. This commission is added to the total expense ratio which is adjusted from the NAV of the scheme. This means that the net asset value of the regular scheme includes the commissions given to the distributor.
Since the total expense ratio (TER) of the regular plans is higher than that of the direct plans, this affects the NAV, which is higher for the direct plans. This means that the investment value would be always higher in a direct plan as compared to a regular plan. The returns are also higher in direct plans. The difference in expense ratio between a direct and regular plan can range from 0.5% to 1% which means that the direct plans will always give higher returns than the regular plans. Over a period of years, this can add up to a substantial amount.
If we leave aside the expense ratio and the higher returns in the direct plans the regular plans have their own advantages too. For a new investor who is not well-versed with the working of mutual funds, the advisors provide hand-holding until they become more aware. Besides this, the advisors are in regular touch with the different AMCs and keep updating their knowledge. This way advisors with their knowledge can help the investors earn higher returns by making them invest in better-performing funds.
There are people who are involved with their jobs and business leaving very little spare time to monitor and review their investments. Over a period of time, their portfolios may not give good returns when not monitored. The advisor who monitors the portfolio can suggest changes to schemes/plans that are better performing. They also provide value-added services like generating statements and helping in redemptions.
It is up to an investor to go with a direct or a regular plan. If they can deal directly with the fund house and have the time to study mutual funds by doing their own research they should go for the direct plan as they would be getting higher returns. They would have to manage the document tracking and compliance issues by themselves. If an investor is still learning and can’t keep up with the schemes and the regulatory updates they can take the help of an investment advisor. Otherwise, both plans have similarities in investment style, asset allocation strategy, and investment objectives.
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