Business News Desk: At present, mutual funds remain one of the most preferred investment options in India. Under this, people can diversify their portfolio and also get the facility of professional managers. Investors are generally given two options in mutual funds, which include regular and direct plans. Both of them invest in similar ways, but the real difference lies in their cost and their method of management.
understand the difference between
Mutual funds pool money from investors and invest it in a diversified portfolio of stocks, bonds or other assets. Its objective is to generate returns for investors by taking advantage of the expertise of fund managers. While investing in mutual funds, investors get the option to choose regular or direct scheme.
In ‘Direct Plan’ investors can buy mutual fund units directly from the Asset Management Company (AMC) without involving intermediaries. Whereas in the “Regular Plan” investors buy units through distributors or brokers, who usually earn commission for facilitating the transaction.
cost structure
The most important difference between regular and direct mutual funds is the expense ratio. Expense ratio is a fee that the AMC charges to cover the management costs of the fund. This includes administrative costs, management fees and other operating expenses. Since there are no intermediaries in the direct plan, the AMC does not need to pay distribution commission. Therefore, the expense ratio is low, due to which a large part of the investment can be used to generate returns.
Does low expense ratio affect returns?
The lower expense ratio of direct plans often translates into better returns for investors, especially in the long run. Even small differences in expense ratio over time can significantly affect the value of an investment due to compounding. For example, 2 plans, consisting of a regular and a direct – if both earn 10% returns, but the regular scheme charges an expense ratio of 1% and the direct scheme charges 0.5%, then the difference in returns in the long term. Can be quite big.
Should one invest in regular plans?
Despite the lower cost structure of direct plans, regular plans can prove to be very beneficial for novice investors. One of the major benefits of a regular plan is the guidance from financial advisors or distributors. Investors can help understand the complex world of mutual funds with the help of a professional who can provide personalized advice based on their financial goals.
It is important to keep an eye on taxation also
Taxation should be kept in mind while choosing regular and direct schemes. The tax structure for both these schemes is the same, as the mutual fund framework for both remains the same. Both regular and direct schemes are subject to capital gains tax, depending on the holding period and type of fund (equity and debt). Both options provide transparency on performance, allowing investors to keep track of their investments and gain insight over time. Also provides the facility to estimate returns.
Which plan is right for you?
The decision between regular and direct mutual funds largely depends on the investor’s experience, goals and preferences. Direct schemes are better for experienced investors, who are able to take decisions on their own and want to minimize costs for long-term growth. These investors can earn higher returns due to lower expense ratio. On the other hand, regular schemes may prove to be suitable for those who are beginners and want to take professional guidance or want to avoid selecting and managing investments on their own. Are.