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A Guide To Understand The Difference Between Direct And Regular Mutual Fund Schemes

Posted on 12-Jul-2023

6 min read

The internet is the best place to browse and learn about making passive or alternate incomes and in due process, one would have definitely come across terms such as direct and regular mutual fund.

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The internet is the best place to browse and learn about making passive or alternate incomes and in due process, one would have definitely come across terms such as direct and regular mutual fund schemes. Well, it would be absolutely shocking if one says no as investing in mutual funds today is a go-to option for extra income. People from almost all age categories prefer to invest given the mind-blowing returns that one can attain from such schemes. Yes, investing in direct mutual fund plans or the other type can be truly profitable. Still, one has to be highly careful about making such a decision by learning about the features of the plan and more importantly about the risks. A blind money-minded decision or just giving heed to positive words from others can land a person in deep trouble with enormous losses of money if one is not doing his or her own due diligence. So, how can a person do one’s own research to acquire a fair amount of knowledge before investing, especially to understand the difference between direct and regular mutual fund schemes? Well, reading blogs such as these, watching the news, and following experts’ talks and lectures can be as well equally enlightening. Now, without any further ado, let us get to know about which plan is the better one, direct or a regular mutual fund plan!

What Is A Mutual Fund?

Though it is a widely known fact that mutual funds are the most sought-after financial option or investment tool, let us still have a gentle recap about them and what really makes people feel so optimistic about these schemes! A mutual fund scheme is an investment method that enables people to invest their money into various shares of different companies for higher returns or growth of capital by enrolling in a single plan or scheme. The major difference between mutual funds and direct stock trading is, in mutual funds, an investor’s capital is split into different investments across different companies after a thorough research and analysis of the market trends then eventually managed by a fund manager.

Beneficial Factors Of Mutual Fund Schemes

The reason behind mutual fund plans, both direct and regular mutual fund schemes being very famous among many investors is due to the fact that they have some stunning benefits that truly attract many people. One of the many benefits of mutual fund schemes as said above is the presence or availability of an expert called the fund manager. The perks of having a specialized person taking care of your investments by understanding market trends and fluctuations, decoding macroeconomic factors, altering and fixing portfolios, and many more can be a lucrative option. Not everyone has the luxury of spending time to learn about the various facets of the stock market while investing in direct stock trading and hence for people like them, mutual funds are the best bet. Understanding the market fluctuations can be too tricky at times as one won’t know or can’t assess why a particular sector of the market falls while another sector that would be underperforming till that point in time will suddenly rise and peak. This is where a fund manager will show his or her expertise by analysing the market fluctuations and routing your investments into the right sectors to hedge the portfolio accordingly.

Direct Mutual Fund

Similar to direct stock trading, a direct mutual fund scheme follows a straightforward methodology. In a direct mutual fund scheme, an investor can directly buy the mutual fund plan from the Asset Management Company prominently known as AMC in short either by going online to the respective website or by visiting the office and interacting with the staff which is an old-school method. Direct plans are best suited for investors who already have a fair idea of how the market works and fluctuates. People who know how to understand the different facets of the stock market during the high and low points actually do not require any assistance from an expert or an intermediary and can boldly invest in such direct mutual fund schemes. Since the AMC does not have to include any extra services, direct plans offer better returns than the regular mutual fund schemes because of a low TER (Total Expense Ratio) and an attractive NAV (Net Asset Value).

Regular Mutual Fund

Probably by now, it would be quite evident what a regular mutual fund is. Yes, just the way you think, a regular mutual fund includes additional services where an intermediary such as a broker or distributor is involved to make the investor understand more about the mutual fund scheme he or she is about to invest in. A regular scheme is best suited for people or investors who find it tough to understand market fluctuations and behavioural factors or for those who cannot spend enough time to learn about the stock market but still would want to invest in it. The involvement of a third party or an intermediary such as distributors and brokers make it easy for such people in terms of financial advice. Be it recommending the best schemes, promoting the mutual fund schemes of AMCs, or explaining technicalities such as NAV, TER, and so on, the presence of an intermediary becomes a huge blessing in disguise for new investors. This is why regular mutual fund schemes are highly recommended for beginners as they can prevent suffering losses.

Difference Between Direct And Regular Mutual Funds

Having said enough about the mutual fund types, let us now look at the difference between direct and regular mutual fund schemes. Well, apart from an intermediary’s presence in regular funds and not in the direct type, are there any other differences one should note before investing in direct and regular mutual fund plans? Yes, there are some technical factors to be counted in such as TER, NAV, and so on. The presence of an intermediary marketing the schemes of an AMC means extra expense for it and that is one reason why the Total Expense Ratio (TER) of a regular mutual fund scheme is higher than that of a direct plan. The financial services from the intermediary such as brokers or distributors mean the AMC pays them which actually adjusts the NAV of the regular plans which is lesser than that of the direct mutual fund schemes.

Direct Vs Regular Mutual Fund – Which Is A Better Plan?

Well, speaking about benefits, both direct and regular mutual fund schemes have their own set of stunning perks and it will be unfair to say only one type is better as the functional difference between them is quite unique. So, how to pick the right one then? Well, it completely depends on the type of investor and his or her requirements. A direct mutual fund scheme is obviously a very profitable variant as it does not involve a high TER and so, it definitely attracts a lot of people. But, it should also be noted that it can suit only people who can do and understand market analytics without which it can be highly risky. But on the other hand, a regular mutual fund plan can be quite safe with the availability of financial advice but of course will provide lower returns compared to the direct plan due to high TER but as they say, safety comes with a price! Furthermore, such regular mutual fund plans open up the market space for everyone to invest and create wealth and not just be reserved for the experienced or advanced category of investors. Hence, it will not be fair to say that only one among the two is a better option as both of them have their own true benefits that suit different types of investors.

Well, the interesting fact about mutual funds is that there is something to gain for everyone but it holds true with certain variations because commitments and responsibilities keep changing from person to person. This is why it becomes imperative to know the difference between direct and regular mutual fund plans before investing in them. The reason behind this is as much as direct and regular mutual fund schemes come with many positives, they are risky in nature as well. So, researching using comparative terms such as “direct vs regular mutual fund” can be helpful to understand which one can suit a person depending on his or her needs but it is just not fair to say only one is the best. So, the verdict is, to choose the right kind of mutual fund scheme, one should be having a clear idea about what his or her goals are and the amount of knowledge he or she has about a mutual fund’s functionality which can actually make a lot of difference.

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