– Offers cost-effective investment options that are better than Regular Plans
– Returns on direct funds are higher when compared to regular funds from the same mutual fund
– Expense ratio for direct mutual funds lower than regular plans as there is no commission involved
India’s homegrown digital financial services platform Paytm’s wholly owned subsidiary Paytm Money is empowering its users with zero commission Direct Mutual Funds which provide an edge to investors over Regular Plans. From this standpoint, as an investor, you should know that mutual funds are offered mainly in two variants i.e. Direct Plans and Regular Plans. Even though both of these variants are similar in a lot of factors, still direct plans are found to be more cost-effective than regular plans. To get the best out of your investments, you need to ensure that you pick the right fund that matches your risk profile. Also, the lesser the cost of managing the fund, the higher would be your end returns.
Varun Sridhar, CEO Paytm Money said, “Investing in Direct Mutual Funds is always beneficial for investors given that they can save up to 1% that goes as commission and the returns can increase. For instance, if you had invested Rs. 1 lakh in HDFC Mid-Cap Opportunities Regular Plan for a period of five years your portfolio value would have been Rs. 1,92,626, but if you invest the same amount and same time frame in HDFC Mid-Cap Opportunities Direct Plan the portfolio value would have been Rs. 2,01,311. This difference of Rs.8,685 or 8.7% in returns is because in a direct plan the brokerage or commission is not deducted from your returns.”
What are Direct Plans of Mutual Funds?
A direct plan is a type of mutual fund scheme that you buy directly from a mutual fund company or the AMC. In this, there is no involvement of an intermediary like a distributor or a bank. Thus, direct plans are free from any hidden fees or agent commissions.
How are Direct Funds are different from Regular Funds?
In contrast to direct funds, regular funds are those schemes that you buy through an intermediary like a broker or a distributor. So, the said broker/distributor levies a fee by way of commission in return for the services offered.
This commission gets added to the expense ratio of the mutual fund and is afterward recovered from the investor. Thus, the expense ratio of a regular plan is higher than that of a direct plan due to the presence of distributor commission.
It means that a higher part of your investments goes into managing a regular fund than getting invested in the capital markets. So, when you invest in a regular fund, you tend to earn a lower return on investment as compared to a direct fund. On the other hand, direct plans offer you up to 1% higher returns than regular plans.
The difference of 1% may seem trivial at first. However, over the long run of say 25 years, such a difference may compound into a huge gap and offer you a relatively higher corpus in direct plans.
Suppose you start a SIP of Rs 20,000 in both a direct plan and a regular plan, then after 25 years, your investments in the direct plan would give you a maturity amount as high as Rs 3.8 crores as compared to only Rs 3.2 crores in a regular plan.
The expense ratio of a fund influences its return potential to a great extent. Investing in low-cost funds like direct plans may help you in your wealth accumulation journey by offering higher returns. Apart from the expense ratio, ensure that you evaluate various funds based on other qualitative and quantitative parameters. At Paytm Money, you can invest in direct plans of mutual funds in a simple and convenient manner.