The mutual fund industry is evolving very fast, thanks to the pro-active market regulator and the change in technology that is helping the entire mutual fund industry to become more transparent from the investor’s perspective. Till a few years ago, most of the mutual fund investors opted for help from a financial advisor to select the right kind of investment. Nevertheless, with the advancement in technology and various investor-friendly guidelines issued by SEBI, disintermediation in the mutual fund industry is fast catching up.
In 2013, SEBI directed all asset management companies (AMCs) to launch direct plans for all their open-ended mutual fund schemes. These direct plans have been created to connect the investors directly to the mutual fund houses without any interference from the intermediaries like brokers, distributors, etc. So, the direct plans are those plans where investors can purchase units of MF schemes directly from the AMCs. They have a lower expense ratio as the investors buy directly from the AMCs and hence do not have to pay any trial fees or commission to any broker or agent. Therefore, the direct plan of a mutual fund scheme having a separate NAV is higher than a regular plan’s NAV.
Many investors are unable to understand the difference between these two and are confused about deciding which one to buy, direct or regular. This article particularly deals with the key differences between these plans.
Both plans, direct and regular, have the same asset allocation, investment objective, and portfolio composition, and similar portfolio constituents. Just like the regular plans, the direct plans also offer various options for investing, viz. SIP (Systematic Investment Plan), STP (Systematic Transfer plan), and lump sum. These plans differ mainly in their respective NAVs and expense ratios. Let us see how these aspects differ in direct and regular plans.
The expense ratio is the percentage of the fund’s average daily net assets utilised to meet the annual operating expenses. These operating expenses include administration, advertising expenses as well as commission paid to the intermediaries. In the case of direct plans, fund houses do not have to incur distribution expenses, which leads to lower expenses and, therefore, lower expense ratio. The expense ratio of direct and regular plans differs by almost 0.5% to 1.5%.
NAV (Net Asset Value)
As we know, the operating expenses are directly deducted from AUM. The lower expense ratio of direct plans leads to a lower deduction of expenses from the AUM, which translates into a higher NAV than the regular plans.
Direct plans score well over regular plans in terms of the returns. The main reason behind this is the lower expenses as explained earlier. The small difference in the initial years turns big over time with the power of compounding.
Direct funds are just a different version of the regular mutual fund schemes. The key difference between these two is that the traditional intermediaries are excluded from the process of distribution and sales.
As mentioned above, this simple exclusion of the intermediaries has an impact on the scheme’s NAV, which in turn increases the return of investment of an investor. So, considering these positive takeaways, investors are advised to buy direct plans of mutual funds as they can enhance their returns over a period of time.
However, while investing in direct plans, investors must do their own analysis and select suitable mutual fund schemes for investment. The investor must depend on various secondary sources to know more about mutual fund schemes. So, investors who do not have the time and capability to analyse the schemes suitable to them can go for regular plans.