Is a Direct Mutual Fund plan always better?
A lot of folks ask me - should I invest Regular plans or Direct plans of Mutual Funds?
You may also have seen advertisements of apps such as Groww and INDMoney saying invest in Direct funds and increase your savings. And looking at that, a direct plan looks like the logical way forward.
But, only if it was that easy!
Don’t worry, we’re here to help you get out of this dilemma and be able to take a decision in the 5 minutes that you read this article.
So let’s start with what a Direct and Regular plan is.
A direct plan, as the name suggests, is one where you buy the Mutual Fund directly from the Mutual Fund house (or Asset Management Company (AMC in short)), or a company that links you directly to the AMC (such as Groww, Zerodha Coin, INDMoney etc).
[An AMC, in short, is a company that sells the Mutual Fund, such as Axis, ICICI, Mirae Asset etc].
Here, since there is no intermediary involved, this means that the AMC will not have to spend money to give commissions to distributors. Therefore, the AMC will pass this on to the investor in the form of returns. In both cases, you as an investor will not pay anything to the distributor out of your pocket. It is the AMC who will pay the distributor in case of Regular plan, but from your returns. In a direct plan, therefore, you as an investor can earn roughly 0.5% to 1% more returns than what you would earn in a regular fund. Compounded over several years, this amount is pretty high.
Now, you may ask, if a Direct plan is better, why would anyone buy a Regular plan?
Here’s why - because they need guidance. If you’re an informed/expert investor who can analyze and understand how to choose a Mutual Fund, ALWAYS opt for a direct plan. However, if you’re not able to decide which Mutual Fund is best for you, you should approach a distributor and buy a regular plan via them. True, you may earn 0.5-1% less in the process, but the distributor will give you sound advice, based on your requirements, because he’s a certified expert for this. If you, however, end up choosing the wrong fund just because you wanted to buy a Direct plan and didn’t know where to go, there are chances to make even losses of 10% if your fund is bad. But in case you’re opting for a regular plan, make sure that your distributor gives you the kind of customized service that justifies the 0.5-1% that will go to him/her. Never buy a Regular plan when you are buying a Mutual Fund online on your own.
I say this from experience. When I started investing, I went for Direct plans because of the commissions, but out of the 3 funds I invested in, 2 made losses. I later started investing via a distributor, and all my Mutual Fund returns had been great! And then when I started developing interest in investing and personal finance, and got a sound understanding of how it works, I started Direct plans again. Now, I can analyze a fund well and therefore, don’t opt for Regular plans any more.
At the end of the day, whether you should invest in Regular plans or Direct plans depends on your situation. For an informed/expert investor, Direct plans are the way to go. But for someone who is starting out, it’s better to opt for a Regular plan so that you are guided by an expert along your journey.
Hope this article somehow helps you to get another perspective on managing your finances better! If you liked the article, please share it on social media and educate your friends too! :)
In case you have questions, please shoot it in comments, or reach out to me on ankurajhaveri[at]gmail[dot]com
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