Ever since direct mutual funds plans were launched with their obvious benefits, more and more investors are investing in direct plans.
Apps like Coin by Zerodha, promote them aggressively on their platforms.
Of course, cost wise, there are strong and consistent benefits of investing in Direct Mutual Funds.
But, are they right choice for everyone? This post will answer this question about direct mutual fund vs regular mutual fund.
- 1 Benefits of Direct Mutual Funds: Short Intro
- 2 Important benefit of Regular Mutual Fund
- 3 Most important factor about direct funds vs regular funds
- 4 Frequently Asked Questions
Benefits of Direct Mutual Funds: Short Intro
The main benefit of investing in direct mutual fund is saving up on expense ratio.
This saving is about ~1% or more of your investment. This saving is invested in the fund of your choice and thus increases your net investment in the fund by same amount.
Over the time, this is huge difference maker.
Apart from this difference, there is no other difference between a direct mutual fund vs Regular Mutual Fund.
This makes a direct mutual fund clear winner, right? Or is it so?
Important benefit of Regular Mutual Fund
In regular mutual fund, the distributor and financial advisor who helps you invest in the fund gets a certain percentage as commission.
This commission comes out of your investment in the fund, in form of expense ratio.
Now, to justify this expense, the intermediary works to research the right kind of mutual fund for you. He also makes sure to help you with paperwork.
In some cases, such financial advisories also guide investors about when to switch the fund as per changing market conditions.
And all these activities are part of major role that your financial advisor plays: Putting you on the path of financial planning and investing.
So we have:
- Paperwork, research and recommendations
- Keeping track of invested funds
- Putting together a financial plan
These tasks come at meagre cost of small percentage of your invested money.
When you are starting out, it takes sometime to gather all the required information and skills, you need to build your own portfolio.
To know how much time is required, simply ask any investor in your circle about how much time it took him to be good at investing.
On average of spending one hour everyday learning about investing from zero knowledge, it takes around 2 years to be fairly good at it.
What regular mutual via a financial advisor helps in doing is, to help you build portfolio while you are learning.
When to stop investing in regular funds
Once you have learned basics of investing and building your portfolio, it is time to move over to direct funds.
This may sound brutish, but this is what is right thing to do to make your money earn more.
In this direct mutual fund vs regular mutual fund debate, this is one of most important thing to understand.
Once you have learned, what you need to learn about the basics, you should not spend on now unnecessary expense ratio.
Rather, use the time and energy to apply you skills, get better and learn more.
Most important factor about direct funds vs regular funds
When you are starting in field of investing, the money you invest is small.
Hence, the money you pay as part of expense ratio is small too.
But gradually, as you progress in your career, you pay increases and so does your investments (they should).
Which means, the money going out into commission also increases, whereas there is no increase in effort required to manage or optimise the portfolio.
Here is a simple calculation about the difference in money spent on commission and extra return you would have generated when shifting to direct mutual funds:
For investment of ₹ 5,000 per month in a regular fund, you pay ~ 1% extra as expense ratio. Thus, ₹ 50 is what you are ‘not’ investing.
So, ₹ 50 per month, for period of 20 years, at approximate return of 15% per annum (optimistic) gives:
Total amount : ₹ 12,000
Value of amount at end of investing period: ₹ 75,797
The amount is not less, but still manageable.
Now, let’s say after 5 years or so, you are able to invest ₹ 50,000 per month.
Now, amount not getting invested is ₹ 500 per month. Let’s calculate the impact now:
₹ 500 per month, for a period of 15 years ( you got to this level after 5 years ) with same returns:
Total amount : ₹ 9,00,000
Value of amount at end of investing period: ₹ 3.38 Lakhs (nearly 4.5 times the earlier amount).
Now, imagin in cities, when both husband and wife are working and investing surplus it much more, the effect can be real big.
Once your monthly investments start to increase, the whole economics of direct fund vs regular fund changes.
Frequently Asked Questions
What are direct plans of mutual funds?
Direct plans of mutual funds are those plans, where there is no commission for intermediaries (in form of expense ratio ) is charged.
Because no intermediary is there, you need to invest in such mutual funds on your own. You can do so via many direct investment apps available online.
Can we convert regular mutual fund to direct?
Yes, you can convert your regular mutual fund plan to direct plan.
For shifting from regular to direct plan of a mutual fund, you need to login to your fund site (AMC), access the transaction page and choose the switch option.
It usually takes 4 working days for your scheme plan to change.
Is there any charge for switching mutual fund plans?
When you switch from regular to direct mutual fund or vice versa, you are exiting the current scheme. This means the applicable exit load will be charged.
The exit load can be anywhere from 0-2% of money invested, and it is different for each scheme.