Topic 2: What are Direct Plans of Mutual Funds? How to buy them?
One must buy direct plans in mutual funds or regular plans? This is one question that often comes to mind while one is researching mutual funds for investing.
Though the answer is short and easy, I thought to write more elaborately about it. It is important for investors to know the difference between direct plans and regular plans before investing. So let's get a few basic concepts and history behind direct plans.
It was around in the year 2012 that SEBI introduced the concept of Direct plans in mutual funds. Earlier, direct & regular plans had only one NAV displayed for both of them. These days they have 2 separate NAV. This makes them very distinguished from each other.
What is the difference between direct plans in mutual funds and regular plans?
Direct plans have smaller expense ratio than regular plans (difference: 0.5-1.5%). Why?
When one buy mutual fund units through a broker/ distributors/ platforms/ agent, they end up buying regular plans.
From the total invested corpus of a mutual fund, a portion is paid to brokers etc as a commission.
This commission becomes a part of the expense ratio of the mutual fund.
This is the reason why the expense ratio of regular plans is higher.
#1. Who can invest in direct plans in mutual funds?
People who know how to pick mutual funds on their own can buy direct plans. The benefit of the direct plan is, one can buy the same mutual fund with a lower expense ratio. As you are not paying any commission, a majority portion of your invested money is used in buying the “units”. Over longer time horizons, buying mutual fund units of direct plans can build bigger corpus compared to regular plans.
#2. Expense ratio makes a difference in returns
The NAV of mutual funds is declared every day. The declared NAV is after adjusting for the expense ratio.
So one need not do a separate calculation for the expense ratio.
How to buy direct plans?
As the name indicates, direct plans can be purchased directly from websites of the mutual fund AMC’s. Mutual Fund AMC’s offer their “direct plans” on their respective websites.
But to invest like this, one must have their PAN number handy. The website will ask for the investor's PAN number to authenticate the KYC. KYC authentication by Mutual Fund AMC’s is must as per SEBI guidelines before investing in direct plans. A person who has a PAN number will get his/her KYC approved in minutes. Once the person enters the PAN number, the Mutual Fund AMC will immediately allocate a Folio Number. From here you are good to do.
Conclusion
Direct plans are more cost effective mutual funds. They have a smaller expense ratio. Over the longer term horizon, investing in direct plans in mutual funds will fetch better returns. But if this is so, why mutual funds offer “Regular Plans”? The regular plans are sold through brokers/distributors/advisors. These advisors help novice investors to select good funds as per one's investment goals. Hence Regular Plans are a better option for those people who have less investing/market knowledge. So it is clear that Direct Plans generate better returns. But is this all? As an investor do we need to note something else? Yes, the difference between direct and regular plan is not so much. For a common man, it does not make a lot of difference (direct plans having marginally better returns). The difference in returns between direct & regular plan can be in tune of 0.5% to 1.5% (in general).
Source:getmoneyrich.com
Though the answer is short and easy, I thought to write more elaborately about it. It is important for investors to know the difference between direct plans and regular plans before investing. So let's get a few basic concepts and history behind direct plans.
It was around in the year 2012 that SEBI introduced the concept of Direct plans in mutual funds. Earlier, direct & regular plans had only one NAV displayed for both of them. These days they have 2 separate NAV. This makes them very distinguished from each other.
What is the difference between direct plans in mutual funds and regular plans?
Direct plans have smaller expense ratio than regular plans (difference: 0.5-1.5%). Why?
When one buy mutual fund units through a broker/ distributors/ platforms/ agent, they end up buying regular plans.
From the total invested corpus of a mutual fund, a portion is paid to brokers etc as a commission.
This commission becomes a part of the expense ratio of the mutual fund.
This is the reason why the expense ratio of regular plans is higher.
#1. Who can invest in direct plans in mutual funds?
People who know how to pick mutual funds on their own can buy direct plans. The benefit of the direct plan is, one can buy the same mutual fund with a lower expense ratio. As you are not paying any commission, a majority portion of your invested money is used in buying the “units”. Over longer time horizons, buying mutual fund units of direct plans can build bigger corpus compared to regular plans.
#2. Expense ratio makes a difference in returns
The NAV of mutual funds is declared every day. The declared NAV is after adjusting for the expense ratio.
So one need not do a separate calculation for the expense ratio.
How to buy direct plans?
As the name indicates, direct plans can be purchased directly from websites of the mutual fund AMC’s. Mutual Fund AMC’s offer their “direct plans” on their respective websites.
But to invest like this, one must have their PAN number handy. The website will ask for the investor's PAN number to authenticate the KYC. KYC authentication by Mutual Fund AMC’s is must as per SEBI guidelines before investing in direct plans. A person who has a PAN number will get his/her KYC approved in minutes. Once the person enters the PAN number, the Mutual Fund AMC will immediately allocate a Folio Number. From here you are good to do.
Conclusion
Direct plans are more cost effective mutual funds. They have a smaller expense ratio. Over the longer term horizon, investing in direct plans in mutual funds will fetch better returns. But if this is so, why mutual funds offer “Regular Plans”? The regular plans are sold through brokers/distributors/advisors. These advisors help novice investors to select good funds as per one's investment goals. Hence Regular Plans are a better option for those people who have less investing/market knowledge. So it is clear that Direct Plans generate better returns. But is this all? As an investor do we need to note something else? Yes, the difference between direct and regular plan is not so much. For a common man, it does not make a lot of difference (direct plans having marginally better returns). The difference in returns between direct & regular plan can be in tune of 0.5% to 1.5% (in general).
Source:getmoneyrich.com