Each mutual fund scheme has two options within it – a direct and a regular mutual fund option. These schemes are almost the same, except for a key difference that makes direct mutual funds an option that gives higher returns.
What are direct mutual funds?
All mutual fund companies introduced direct mutual funds after The Securities and Exchange Board of India (SEBI) in January 2013 made it compulsory for all Asset Management Companies (i.e. Mutual Fund companies) to allow investors to invest in mutual fund schemes directly via direct plans as opposed to via agents, brokers or distributors, as is the case with regular fund plans.
Mutual Funds charge you annual management fees for managing your money in their funds. This is known as expense ratio and is usually expressed as an annual percentage for eg 2% per annum. This percentage is cut on a daily basis from your returns and after subtracting these fees, the Net Asset Value (NAV) of the scheme is published every day.
Most of the expense ratio/management fees is for the mutual fund company to cover costs of running the scheme.
In regular mutual funds, a small part of it is given to the intermediary like a broker or distributor as commission for facilitating the investment. This is not the case in direct mutual funds as they are supposed to be bought without an intermediary.
Due to this difference, the expense ratio of a regular mutual fund scheme is more than that of a direct mutual fund scheme, making regular mutual funds more expensive than direct mutual funds for the end customer. And because the fees are more, the NAV is lesser in regular mutual funds.
Let’s understand better with an example:
Suppose Ms.A invested in Canara Robeco Blue Chip Equity Fund-Direct Plan and Mr.B invested in the regular plan for the same scheme at the same time. Take a look at the returns below.
Table to be updated, re-looked:
As we can see, the returns are higher for direct plans in each time frame by about 1.2% which is roughly the same as the difference in their expense ratios,
So in short,
Regular plans -> higher fees -> lower returns
Direct plans -> lower fees -> higher returns
Let’s see an example of how much difference this could make in the
Both Mr. A and Mr. B have started a monthly SIP of Rs 5000 in the respective funds, Using SIP Calculator, let’s see their projected amounts at the end of 20 years.
In conclusion, you’ll be earning anywhere between 0.5% to 1.5% more every year if you invest in the direct mutual funds.
The table below summarises the difference between regular and direct mutual funds.
How does Niyo Wealth help you with direct mutual funds?
At Niyo, we only provide direct mutual funds. Pay zero commission, earn higher returns and make unlimited investments.
The traditional way of marketing and investments are changing, and we at Niyo are helping you change with it.
We help you, help your money grow. Niyo Wealth is here for the best experience with your investment.