Mutual funds are an investment product that pools money from a group of investors to purchase different securities like stocks, bonds, gold and money market instruments through an investment vehicle. After buying a unit through mutual funds investment, you own a small stake in all the investments included in the fund. Mutual funds can be an ideal investment choice given their ease of use and the advantages they offer.
How do mutual funds work?
Apart from asking “What are mutual funds”, prospective investors also want to know how mutual funds work. Asset management companies or AMCs manage and operate numerous mutual fund schemes. Each scheme of a mutual fund has a specific investment objective that is known for catering to distinct investment needs. Depending on the fund’s objective, the money collected from investors is placed in various avenues such as gold, bonds, stocks and other securities. A finance expert referred to as a fund manager whose goal is to earn optimum returns on the fund’s investments takes care of each fund. The revenue earned by the fund is divided and distributed among the investors proportionately.
One of the important things to remember about these investment plans is that they are not a monolith and that there are several types of mutual funds available in the market. One of them is a direct plan of mutual funds and the other is regular plans. A direct plan is a type of mutual fund that can be bought directly from the AMC. In simple terms, unlike a regular plan, in a direct plan, there is no involvement of the third party such as brokers, agents or distributors. In fact, a clear distinction can be made between a direct plan and a regular plan as listed below:
|Under a direct plan, a third party isn’t involved
|Third parties such as agents or brokers are not involved
|The revenue earned is high
|The revenue earned on a regular plan is significantly lower
|The expense ratio is low as there are no additional fees
|They have a significantly higher expense ratio. Moreover, they also involve a third party
|The net asset value of the portfolio is higher as no commissions are involved
|The NAV will be significantly lower as commissions will be paid to the third party
|Under a direct plan, an investor needs to carry out market research on their own
|Under a regular plan, market research is carried out by the financial advisor
|An investor can not enjoy investment advice
|Under a regular plan, investors can get advice from financial experts
What are the benefits of investing in direct plans?
Listed below are some of the advantages of investing in direct plans of mutual funds:
- They have a lower expense ratio:
In simple terms, the expense ratio can be defined as the fee that the fund managers charge for managing the fund. The expense ratio is lesser for direct plans when compared to regular mutual funds. That’s because third parties are not involved in direct plans. Regular plans have higher expense ratios as AMCs pay commissions to agents for their services, which is added to the expense ratio.
- Investors can enjoy higher returns:
As stated earlier, the expense ratio of direct funds is lower than regular funds. The reason is that there is no commission or brokerage involved in direct plans. Therefore, they yield slightly more returns than regular funds.
- They have higher NAV:
The net asset value (NAV) of a mutual fund can be defined as the per-unit market price of all the securities held by the scheme. In simple words, it is the ratio of the total value of assets minus the value of its liabilities. The assets of a mutual fund include things like equity shares, debt instruments like bonds, treasury bills, cash etc. Hence, the NAV of direct mutual funds will be higher than regular mutual funds as there is no distribution commission.
If you are someone who wishes to directly deal with AMCs rather than intermediaries, you may opt to consider investing in the direct plans of mutual funds.
Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.