Understand the difference between Direct and Regular Mutual Fund

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Before we start to make you understand the difference between Direct and Regular Mutual fund, Let us share a small story.

Mr Nitin visits his friend for dinner. His friend tells him that his advisor asked him to invest in ABC Bluechip fund and he did so. He also shares that he has made purchase on 01.06.2015 when NAV was Rs 26.79. Mr Nitin impressed by his friends investment and plans to invest for himself too. He searched on internet about ABC Blue Chip fund and found that NAV on 01.06.2015 is Rs 28.78. He got confused that how his friend buy mutual fund at Rs 26.79 instead of Rs 28.78. Do you also think that this is confusing for you?

This is the difference between a Direct Mutual Fund and Regular Mutual Fund scheme. Let us discuss these two first before proceeding further.

Direct Mutual fund Plan

Direct Mutual Fund Plans are introduced by Securities and Exchange Board of India (SEBI) in January 2013. It makes mandatory for all Asset Management Companies to provide a direct route of investment without the help of broker or other intermediary. So, we can define direct mutual fund plan as an option provided by AMCs to investor by which investor can invest his money in mutual fund without the involvement of any agent, broker or distributor.

Regular Mutual Fund Plan

In regular mutual fund plan, an investor can invest in mutual fund on the recommendation of the mutual fund agent, broker or distributor. A mutual fund AMC appoints various agents, brokers and intermediaries to sell their product and motivate investor to invest in its scheme. AMCs pay commission to these intermediaries on a pre determined rate. This commission rate is count as the expense of the scheme and deducted from the NAV of the scheme. It means it is bear by the investor ultimately.

Benefit of Direct Plan over Regular Plan

As direct plan does not involve any intermediary for investment. It helps to save the cost of commission paid to intermediaries by the AMC. This cost of commission is added back to the NAV in case of direct plan and hence reduce the expense ratio. Therefore, investor receives additional return on this added amount. Whereas in regular plan AMCs include this commission amount under expenses and hence deduct from the NAV. Therefore, regular plan is having NAV less than direct plan. All mutual funds have to disclose expenses ratio of scheme. On an average difference between direct plan and regular plan expense ratio is about 1%. If you are choosing direct plan than this 1% will add to your NAV and you will get higher return.

Now when we are aware about both types of plans, we have found the solution of the above problem.

Now we can understand that Nitin’s friend invested in ABC Blue chip fund on the advice of his broker. Therefore, his money was invested by his advisor in regular plan of ABC Blue chip fund. Nitin searched for the direct plan. That’s why there is two different NAV of the same fund on the same date. A high value of direct plan NAV means that direct plan gives higher return than regular plan of same scheme. If you know how to choose a mutual fund scheme for your objective than you can invest in direct plan of mutual fund and earn higher profit.