Should you opt for regular plans or direct plans in mutual funds?

Participation in domestic mutual fund has observed a tremendous growth in the past few years, specifically through systematic investment plans (SIPs). All the mutual funds offer two types of plans – Direct and Regular. While investing in a direct plan, the investor has to invest directly with AMC with no intervention from the distribution for facilitating the transaction. On the other hand, when investing in a regular plan, the investor is guided through an intermediary or a broker who is paid his service fee by the AMC, which is included in the plan.

Hence, direct plan has comparatively a lower expense ratio since there’s no involvement of any distribution fee, while a regular plan has a slightly higher expense ratio, subject to the commission paid to a distributor to facilitate the transaction. However, the investment mix and objective of the scheme portfolio remains the same for direct or regular plans.

Direct mutual funds are known to provide better higher returns than their regular counterparts, so it is suitable for all kinds of investors. The returns in both the cases would differ by around 0.5% per annum depending upon the mutual fund’s expense ratio. Hence, the investors who want to have a favorable increase in their returns by the way of reducing the expense ratio should opt for direct plans. Moreover, those returns keep compounding over the years which means, when less expense is deducted, your investment proves to be much more worthy.

Investors who are sure of handling the investments on their own along with the documentation process can choose to go ahead with direct plans. The entire procedure consists of submission of mutual fund applications, portfolio consolidation, tracking, inclusion of nominee and modification whenever required, updating address whenever needed, etc. Since the whole process can be managed online, it has become a lot easier to invest in direct plans.

Conclusion

So, if you think you are a diligent investor who can track and pick your own mutual funds with complete knowledge, then the direct plan is right there for you. On the other hand, some people prefer relying on an exterior recommendation; in that case, a regular plan would suit your needs. If your broker or entity is aware about what they’re doing without any biases or influence of their commission they earn, you could potentially earn a lot on your investment V/s what you could have done on your own.

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