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There are two categories of mutual funds sales in India — direct mutual funds and regular mutual funds. The former can be purchased directly from an asset management company, while the latter is sold through an intermediary.
In this post, we will look at both of these kinds of mutual funds sales and try to understand the difference, so that choosing between the two becomes easier.
Direct mutual funds allow investors to directly make purchases in the form of direct plans from an asset management company (AMC). Among these, there are three types of mutual funds that you can purchase.
The first is the open-ended funds, the second is the New Fund Offers (NFO), and the third is the intervals fund.
In the direct mutual funds, agents, merchants, or different intermediaries do not have a task at hand. Investors are free from commission or distribution charges, which cuts down the cost proportion, making it a highly cost-effective choice. You will not be charged with a transaction fee even if you make a lump sum investment or start a SIP. This is because you are directly paying the company which is releasing these funds. They have a different Net Asset Value (NAV), and the outline will specify "Direct" to enable investors to identify direct plans and ease up the purchasing process.
Unlike direct mutual funds, you purchase regular mutual funds from a broker. This works in a way where the fund house sets a commission for the brokers for bringing in new investors. This is then added to the expense ratio by the AMC. This is the reason regular funds are somewhat more costly than direct reserves. However, they also bring sufficient clarity and industrious experience with them.
You may initially look at funds with a lower price and considering their cost-effectivity, they look like a decent bargain, as it is less expensive. However, if you take a rushed decision, you may end up picking a mutual fund of low value, which may not be a great addition to your investment portfolio.
Unless you are someone who has industry level experience, you may need assistance to find out the best fund, which is out there and pick a fund according to your prerequisites. A direct plan is for you only if you are a shrewd investor with an in-depth knowledge of the market and mutual funds scheme. The advisor, in this case, does not provide any extra value, so there is no point in paying a fee. However, many people do not have much knowledge of the market or the funds in general, and they act on someone’s recommendation, and for that, they may need a regular mutual fund plan.
So, if you are a diligent investor with in-depth knowledge, meaning that you can pick and track your mutual funds, then the direct plan is better. The advisor provides no extra value and does not deserve their fees. For most people, however, relying on someone's recommendation is the only option.
There is also a difference of 1 percent in the expense ratio of direct and indirect mutual funds. This one percent then accumulates to be a significant amount over time. For example, say that you have invested a sum of Rs 10 lakh in a regular mutual fund which spans for 20 years. When compounded, the sum will grow to around 11.5 lakh if the annual growth rate is compounded at 12 percent. However, if the same amount — Rs 10 lakh — is invested for the same period of 20 years at a compounded interest rate of 12 percent, it will grow to be at Rs 18.7 lakh.
If you are confused about which plan you are currently invested in, then you should check account your fund holding statement. The fund holding statement, or the account statement, clearly states if you are invested in a regular or direct fund. The rule of thumb is that if you have invested in a mutual fund scheme through a bank, then it would be a regular plan. If you have invested through a website of the mutual fund, then it would be a direct plan.
Another thing to check is if you are receiving a free service from your agent — them saying that they are paid by the mutual fund company. If that is the case, then the plan you would have invested in would be a regular mutual fund, and you might be paying a hidden fee which pays for your fund agent.
Depending on your understanding, you may sometimes have to switch between regular and direct plans. You may do it either through the fund’s website, or you can go to your Registrar and Transfer Agent (RTA).
RTAs have an online form which can be used to make a switch between direct and regular funds easily. The online process is hassle-free — perhaps the most recommended way to make a switch. You can also request for a fund switch on your asset management company website by filling a form online. However, if you own more than one funds, you may have to fill multiple AMC forms.
Before you make a switch, do remember that switching is considered to be an act of redemption. So when you make a switch, you redeem your existing mutual fund and invest into a direct version of the same plan. This may also attract an exit load, and short term capital gains (STCG) tax might apply.
Both regular and direct mutual funds come with their own sets of pros and cons. However, that does not mean that they should define your investment portfolio. Both of these funds operate on the same grounds, and the difference between them only come through the commission that is paid.
Mutual funds are a great way to accumulate savings over time. On Finserv MARKETS, mutual funds are transparent and come with no hidden charges. It is quite easy to open an online account and start investing. With Finserv Markets, you will also get access to your investment portfolio, which will speak volumes on how your investments are performing in the market.