Direct mutual funds refer to those funds directly offered by fund houses and/ or asset management companies. Here, no brokers, distributors or alternative third-party agents get involved. Investors don’t have to pay any brokerage fees or commissions in this case. This, in turn, means that the expense ratio of direct mutual funds is lower. Therefore, investors get to enjoy greater returns.
SEBI brought direct mutual funds into the markets in 2012. Their introduction was meant to allow investors to purchase mutual fund units without engaging with an intermediary. It is possible to easily identify a direct mutual fund owing to the fact that the word ‘direct’ is prefixed prior to the fund’s name. It is possible to invest in these funds online as well as offline.
Units of this form of a mutual fund are purchased via an intermediary. This intermediary can take the role of a distributor, advisor or broker, among others. Fund houses are expected to pay intermediaries a fee in order to have them sell their mutual fund units. Asset management companies can ordinarily recover this fee via their expense ratio.
Regular mutual funds attract a slightly higher expense ratio in contrast to direct mutual funds. As a result, the returns drawn from direct funds tend to be slightly higher. Regular mutual fund plans are ideal for investors with limited market knowledge. These funds are also recommended to those that don’t have the time to spare to monitor their portfolio. This is because investors are able to take advantage of expert, professional advice in lieu of a modest fee.
If you wish to buy or sell units of direct or regular mutual fund units, you must take into account the net asset value (or NAV) for the fund on the day of the transaction. The formula for NAV is given below.
NAV = (Assets – Liabilities)/ Total number of outstanding shares
The resultant figure helps reveal a fund’s per share or unit price on a specific date. It is calculated at the end of each trading day, keeping in mind the closing market prices of the fund portfolio’s securities.
Direct mutual funds and regular mutual funds are managed by and the responsibility of a professional fund manager and their team of analysts. Together, they assess the market securities before pinpointing those most aligned with the fund’s common objective.
While mutual funds governed by regular plans pay a commission in the form of a distribution fee, mutual funds governed by direct plans don’t incur commissions or these fees. Examine the table outlined below to understand other parameters along which these two funds differ.
Regardless of whether you wish to invest in a mutual fund with a direct or regular plan, you must first be aware of your investor profile. Understand what you wish to achieve via this investment, how long you are willing to remain invested in such a fund and the risks you are willing to undergo. After you have considered this information, should you start investing in a mutual fund.
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An advantage of investing in a mutual fund with a regular plan instead of a direct plan is that you don’t need to worry about knowing the nitty-gritty of the market. Professional advisors can help guide you on your investments.
A disadvantage associated with direct mutual funds is that they require a fair amount of your time and knowledge since you are investing in these mutual funds on your own.
While the net asset value of mutual funds with direct plans exceeds that of funds with regular plans, this factor alone shouldn’t imply that direct plan mutual funds are better. Ultimately, the mutual fund that is better will depend upon you, your investor profile and your knowledge of the market.
A direct plan for a mutual fund doesn’t involve any intermediaries (i.e., brokers or distributors), and investors directly invest in the fund. On the other hand, mutual funds featuring regular plans involve intermediaries via whom fund units are purchased.