“What are Direct mutual funds?”
“What’s the difference between Direct and Regular mutual funds?”
“Are Direct funds better for investment as compared to Regular funds?”
“How to invest in Direct plans of mutual funds ?“
These are a few of the most frequent questions that we have received recently. Here is everything you need to know.
Also, in case you are new to the mutual fund investment world, check out this complete guide to investing in mutual funds for beginners in India.
Table of Content
In this article:
- What are Direct Mutual Funds?
- Conflict of Interest (Confusion in the users’ mind: Direct vs Regular).
- Cost of Investing in Direct Mutual Funds.
- Direct Mutual Funds are not for you if…
- Sqrrl is now direct because we’re on your side.
What are Direct Mutual Funds?
Before telling you about how to invest in Direct plans of mutual funds, let’s give you a brief about Direct mutual funds. Starting 1st january 2013, after a SEBI purview every mutual fund in India comes in the form of two plans for the investor to pick from – a ‘Regular plan’ and a ‘Direct plan’. These are two parts of the same scheme and are run by the same fund manager. The fund invests in the same stocks and bonds, but with one very crucial difference:
The Regular Plan Costs you More!
Under a Regular mutual fund plan, the Asset Management Company (AMC) pays a small percentage of commission, every quarter. This is a small commission that is paid under the expense ratio of the fund and can range anywhere between 0.1-1% of your investment amount.
Under a Direct mutual fund plan, there are no commissions paid to anyone. Instead, this difference of the commission that would have otherwise been paid to the broker (0.1-1%) will be added back to your investment in the mutual fund, resulting in a higher return on investment. So the question still stays – How to invest in Direct plans of mutual funds?
Difference between Direct and Regular Mutual Funds: What, Why & How?
If you’re reading this, chances are you are a beginner investor or have invested in certain mutual funds without knowing the difference between direct funds & regular funds. At these stages, we believe you have four very important questions in your mind.
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- How do I know if I have a direct or regular plan?
- I was told in the long run commissions don’t matter and so there’s a nominal difference between regular and direct funds, is it true?
- How do I buy direct funds, or how do I switch my current investments into direct?
- How to invest in Direct plans of mutual funds?
We’ll try and help you get answers to all of these questions in the simplest way possible.
Let’s begin:
- How do I know if I have a direct or regular plan?
The first step you need to take when you start investing in the market is to make sure of your choice of plan. Check whether you have invested in a Direct/Regular plan. The easiest way to know this is to check the monthly statement that you receive from the mutual fund that you have invested in. The scheme name will either say ‘Regular’ or ‘Direct’, and that will help you in figuring out whether your investments are in a Regular mutual funds or a Direct. This is the first step we need you to take before we can answer “How to invest in Direct plans of mutual funds” for you.
Direct and Regular Mutual Funds Guide
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I was told in the long run commissions don’t matter and there’s only a nominal difference between regular and direct funds — is it true?
If you have read till here, our guess is that you desperately want to know how to invest in Direct plans of mutual funds so you can start investing ASAP. You want to compare direct and regular plans and make the best choice. What about the commission charges? This is a question that arises in the mind of every investor at one point or another when they become aware of the differences between Regular mutual funds and Direct mutual funds. Before telling you how to invest in Direct plans of mutual funds, we want to wary you against a very common phenomenon. Your investment advisor or agent might tell you that it doesn’t matter which plan you invest in since a 0.1-1% fee is nominal enough to not affect you in the long run.
Consider this scenario – if you are looking to invest for the next 30 years, putting in a total of Rs. 10 lakhs in a Regular mutual fund plan, and are expecting a nominal return of 8%, your investment could be worth Rs. 76 lakhs by the end of it. However, if you had invested in a Direct mutual funds, the same amount plus the added 1% commission that you would have paid in case of Regular mutual funds, your investment could be worth Rs. 1 crore in the same period. In simpler terms, while the nominal fee might not make much of a difference in the short run, this could have a huge impact in the longer run, in this case about 1/4th of your final investment amount. The graph below would better help you understand how this might turn out in the longer run.
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How do I buy direct funds, or how do I switch my current investments into direct?
In this section we will address how to invest in Direct plans of mutual funds and how to switch your current investment into direct in the easiest way possible? There are several ways in which you can go about buying a Direct mutual fund plan. You can register manually at the AMC’s website, do your KYC for each AMC that you want to buy a Direct mutual fund from and then continue investing. However, several online investment advisors offer the convenience of one-time registration & advise you on purchasing the best Direct mutual fund for yourself. However, while some of these platforms are free to use, some have different types of subscription plans or one-time charges.
Cost of investing in Direct mutual funds, be it a hidden distribution fee or the fee that advisors charge, affect your pocket eventually. A high commission or a fee model eats into your returns.
Generally, investors neglect the fees aspect as the differences between the best and the worst ones are just 1-2% per annum. However, one shouldn’t neglect the power of compounding. Even a difference of 1% in fee adds up to a good 30% in the long term.
That’s why it’s a good idea to understand the different types of fees and commission. You can go and read our detailed guide on the different types of fees & commissions to understand this in a better manner before you know how to invest in Direct plans of mutual funds?
Who should not invest in direct mutual funds?
Now when we have captured the benefits of the regular plan, let us share with our readers, who all should not invest in direct mutual funds:
- Investors with limited knowledge about the capital market– We believe investors who do not have any prior experience regarding investments, particularly in the capital market, should typically opt for the regular plan so that they get proper to advise with regards to investments.
- Investors who are not aware of technicalities such as rebalancing– As highlighted in the previous section, the portfolio must reflect conviction at all times concerning risk appetite, horizon, and the likes. Thus, if an investor is not a pro at portfolio rebalancing, the regular plan is better so that the advisor can rebalance the portfolio and book profits at regular intervals as it may deem fit for the investor.
- Investors who cannot track and monitor portfolio regularly– Investing through direct plan requires continuous monitoring. Should there be a situation where an investor is unable to track the portfolio, he/she should opt for the regular plan so that the advisor can track the portfolio and performance regularly on his/her behalf.
Thus, to conclude, we believe while many individuals believe a direct plan offers better returns, it may not suit everyone and a rational decision is important depending on the investor’s understanding of the investment market.
Direct Mutual Funds are not for you if…
How to invest in Direct plans of mutual funds, is the second thing – first of all, we need to ask you a very important question. Did you know that in late January 2018 when the markets turned volatile with double-digit corrections, witnessed over a couple of months, investors(mostly direct investors) started panicking? The bull run that saw a huge number of investors flow in the market by way of direct mutual funds, started speaking regarding stopping investments or shifting to a more organized regular plan.
The question above is also important before you start understanding how to invest in Direct plans of mutual funds and be 100% sure about it.
Does this mean that Direct funds are always good?
The answer is Not Always.
While in a direct plan, an investor saves on the commission that grows to provide significant profit but in times when the market is volatile, these investors tend to lose more money due to lack of expertise which is otherwise brought to the table by a fund advisor.
Before knowing more about, we believe an investor should opt for the regular plan due to the following:
- Recommendation for investment– While it is true that direct fund provides better returns, a well-selected fund (even if it is the regular plan) can fetch superior returns than a direct plan. Thus, what remains crucial is advice from experts.
- Other services such as review and rebalancing– depending on the investment horizon, goal, and risk appetite it is important that the portfolio is rebalanced at every interval. This ensures that the investment completely reflects the conviction of the investor and suits his/her appetite. This rebalancing is offered by the advisor strategically to ensure that good performing funds are not left behind.
- Additional services including facilities such as facilitating investment, redemption, tracking, updating an account, etc– A small fee not only provides you with the benefit of tracking and advisory but also makes things simpler with regards to the regulations and compliance. It undoubtedly helps you save time and effort.
The next section discusses Sqrrl’s role in helping you in understanding how to invest in Direct plans of mutual funds and benefit from it.
Sqrrl going Direct, because we listened to you!
These are our guiding principles, and we remain committed to you by adhering to them.
“We vow to never compromise your interest for commercial considerations. YOUR needs are what guide us.”
Guided by this principle, we have always taken decisions in your best interest. When we started, we decided to offer probably the best and the simplest product for beginner investors – regular mutual funds. In fact, for small investors, there are no significant differences between direct and regular mutual funds.
However, along with you we have also evolved. We have seen your investment with us grow, making the impact of zero commission in the direct funds substantial in the long run.
That’s why we are giving up the commissions and taking the route that’s in your best interest – Direct mutual fund! Now, if you are still thinking about how to invest in Direct plans of mutual funds, you know who to come to.
First, direct plans have a lower expense ratio as fund houses don’t have to pay commission to us or any other distributors. That’s why given all other factors are the same, the direct plan will have a better return than a regular plan. While the difference is generally 0.5%-1%, in the long term this difference could add up to a good 30%.
Second, as we don’t earn any commission from fund houses, now, more than ever, we are betting on your success. By giving up our commission from fund houses, we want to assure you that we are in this together! We hope you are clear about how to invest in Direct plans of mutual funds.
With the direct plan, you earn better, and we cheer for your prosperity, as always 🙂
If you still have questions, check out our blog on the frequently asked question about Direct Mutual funds.
Our app is designed to help all people invest, regardless of whether you have an intricate knowledge of Best Direct Mutual Funds or not. Setting up a SIP, or setting up a future investment like planning a vacation, Retirement Fund, etc. can be done with Sqrrl in minutes. And don’t you just take our word for it, we’ve got little demos of the app here, go through them and tell us what you think.
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