KNOWLEDGE CENTRE Mutual Funds Comparison / What Is The Difference Between Direct Funds And Regular Funds?

What Is The Difference Between Direct Funds And Regular Funds?

Transparency is the key to determining the actual cost of anything, be it items you spend on or your investments. The sales person or your broker tells you that you will earn a certain return on your investment and you go ahead and invest in it if you are happy with the returns. However, you are not able to check if you are getting what you are actually paying for. This is simply because the investment you are making is the cost you are paying to earn the return. When selling the instrument to you the broker will state that some standard charges will be cut from your investment or the earnings thereof, but seldom do they highlight the details of such charges. You, finding the offer lucrative go ahead, invest and move on.

Both of these are exactly same but the former costs more than the latter. Below is a brief description of these two categories.

1. What are Regular Mutual Funds?

All mutual fund investments made through your bank or broker are regular mutual funds. There will always be a commission component deducted from your earnings from such investments. In case you are unsure, you just need to check the account statement. This deduction directly affects the Net Asset Value (NAV) and the earnings because the amount that is re-invested in the fund is reduced by the commission amount.

Simply put, even a 1% deduction for commissions reduces your earnings by the same and the compounded growth of your investments is accordingly affected. For instance, if the fund is earning 9% returns, you are entitled only earn 8% returns.

2. What are Direct Mutual Funds?

Mutual funds that you purchase from your online financial adviser are direct plans. Under these plans, you do not pay any commission on your investment. You may want to know how to buy direct plans.

Prior to the availability of such online access, purchasing direct plans was a tedious and cumbersome process. You had to directly register with the fund management company and submit plenty of documents. Moreover, this procedure was carried out every time you wanted to buy a new mutual fund.

Having registered with the online financial adviser you do not have to do complete additional documentation. Simply log in to the portal, go through the recommendations of the adviser and make your investment in the fund of your choice.

To bring in more transparency in the mutual fund investing and advisory businesses, the Securities and Exchange Board of India (SEBI) has mandated that all investment advisories be registered with SEBI and disclose their commissions. SEBI has also mandated that fund houses issue direct plans wherein the investors do not have to incur any commission costs.

Difference between Regular mutual funds and Direct mutual funds

There is only one difference between the regular and direct mutual funds and that is of the commission charged to the investor is paid to the broker. In regular mutual funds, even without the investors knowing it, a commission is deducted from the earnings of the fund that is to be re-invested. This results in the reduction of the maturity amount to the investor. However, this is not the case with direct mutual funds as there is no commission paid to any broker of any sorts therein.

It is possible that you invest in mutual fund plans to save taxes. Several tax-saving mutual fund schemes are offered by fund houses. You may evaluate the different plans to make an appropriate choice. However, ensure you invest in a direct plan to maximize your returns on tax-saving mutual fund plans.

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