Difference Between Regular Vs Direct Plans in Mutual Fund ?

Difference-Between-Regular-vs-Direct-Schemes-in-Mutual-Fund

Mutual fund is an investment fund where multiple investors pool their money to purchase securities. Such funds are managed by a highly trained professional commonly known as a fund manager or portfolio manager. Due to factors like benefit of diversification and comparatively stable returns, mutual funds have become one of the most looked after investment options. 

When you opt for mutual funds you can invest through 2 schemes i.e. through regular or direct schemes. Let’s briefly talk about both the schemes. Direct investment plan is where an investor can directly invest into the company’s plans, generally through its website. Regular investment plan is where you buy the same securities through an advisor. 

What is the Difference Between Regular and Direct Schemes?  

In direct schemes the expense ratio is low as no brokerage is paid to any adviser resulting in comparatively high returns as compared to the indirect schemes.  However, the major problem with these schemes is the lack of professional advice. Here, it is very common for people to make wrong decision and lose all the hard-earned money. 

The investor, himself, has to do market research and analysis. In making any investment decision there are a lot factors to be kept in mind such as the market outlook, investment objective, rate of inflation, periodical readjustment of portfolio, etc. These require a lot of time & labor and require special knowledge of the financial markets which a common investor may not possess.

In indirect schemes, a brokerage is paid to the adviser. So, the expense ratio is high making the returns lower than returns on direct plan. But, it shall be noted that such brokerage is generally very less compared to the reduction in risk which is the main goal of any financial advisor.

However, the main merit of such indirect scheme is the presence of a professional adviser. Any investment decision made by the investor is guided by the professional supervision of a financial planner hired by the investor. 

Such financial planner is usually a person who has high expertise in financial analysis and planning. He uses his knowledge into finding the best alternative for meeting the client’s requirement and fulfilling the ultimate financial objective. Therefore, here the risk of losing investment or non-achievement of investment objective is low as compared to direct schemes.

Which Plan is Better For You?

Each plan has its own merits and demerits. It is clear that direct plan has more benefits to it. However, the associated risk of uninformed investment is also very high. One wrong decision could lead to loss of all your money. Hence, it could be concluded that only those with good knowledge of financial markets shall primarily use direct plans. A person with lack of such knowledge and expertise is advised to invest in indirect schemes and use the help of a professional adviser.

How Do Mutual Funds Work?

How Do Mutual Funds Work?

Mutual funds are one of the most popular financial instruments in town. Mutual fund is a collection of funds pooled in by investors and managed by a portfolio manager. Such funds are invested into various schemes in accordance to the earlier set objectives.

While the above information is generally available on all the online sites, the actual working of such funds isn’t told with much clarity and we ought to clear all your doubts on the actual working of mutual funds. So, let’s start. 

As mentioned earlier mutual funds are a pool of resources instead of being a single resource which means there are multiple investors who have put money in a fund. Each person who has invested their money into the fund gain ownership over a part of the fund, known as a unit. We can also say that the entire fund is subdivided into multiple parts known as units. So, when a person wants to invest in a fund he has to buy these units. 

Such mutual funds are of many types like equity funds, debt funds, hybrid funds, income funds, growth funds, index funds etc. Each fund has its own objectives, risk & reward. Different investment bankers offer different schemes. You may select the one which favors your objectives the most.

When you select the scheme you want to invest into, you have to buy the units. Once you buy the units, the investment bankers allocate the money to that fund. Generally, under the umbrella of a mutual fund there are many companies under it. They are known as sub-holdings.

Let’s understand this more clearly with an example of an equity mutual fund. Normally such mutual funds allocate around 70% of the total corpus in equity, 18% in debt and 12% in other securities. Within such umbrella of securities, there are a large number of companies. 

The investment of money into a various types of securities a dividend supported by fixed returns. Also, within such types of securities, example- equity, there are a lot of companies existing in various sectors such as banking, refineries, housing finance and construction, etc. This helps the corpus through the benefit of diversification so that if any of these sectors under performs there is a low impact on the overall value of investment.

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