According to the Securities and Exchange Board of India (SEBI), Asset Management Companies (AMCs) can offer two types of mutual funds based on the route of investment: regular funds and direct funds.
When comparing direct mutual funds to regular mutual funds, there are three major distinctions that are all interconnected: the Net Asset Value (NAV) or price, the method of acquisition, and the ongoing cost (total expense ratio). Each approach has its own set of advantages. Let’s discuss them.
What is a direct SIP?
The kind of mutual fund scheme directly offered by the AMC is a direct mutual fund. In other words, there are no third-party brokers or distributors involved. You can invest in the scheme directly from the AMC’s website online or by visiting their branch. Hence, when you choose to start a Systematic Investment Plan (SIP) in a direct mutual fund scheme, that is called a direct SIP.
The asset management organisation does not bear the distribution expense because distributors of mutual funds are not involved in direct plan investments. A comparison of direct mutual fund plans with standard mutual fund plans reveals that overall expense ratios for direct plans are lower.
What is a regular SIP?
Mutual fund plans purchased through an intermediary are known as regular plans. Brokers, consultants, and distributors are some examples of these middlemen. When marketing their mutual funds, the fund house pays the intermediaries a specific commission. The expense ratio is often how the AMCs get this fee back. When you start an SIP in a regular mutual fund scheme, that is known as a regular SIP.
The distributors receive commissions from the AMC in return for such services as long as you keep investing in the regular mutual fund schemes. The AMC adds these commissions to the Total Expense Ratio (TER) of standard plans. Regular plans, therefore, have higher TERs than direct plans.
What is the difference between regular SIP and direct SIP?
Net Asset Value: Any mutual fund plan’s TER is modified based on the NAV. The NAV of direct plans is higher than those of regular plans because the TERs of regular plans are greater than those of direct plans. In other words, if you had chosen the regular plan instead of the direct plan, the value of your investment would have been lower after your purchase.
Returns: Depending on the commission structure of AMCs, the TER difference between direct and regular plans varies from scheme to scheme and from AMC to AMC. For instance, equity fund commissions are typically greater than some debt fund commissions, such as overnight funds, liquid funds, etc.
Fund managers can better distribute the fund’s gains to investors when there are no third-party commissions to worry about. However, to safeguard investors against capricious practices, SEBI consistently analyses the expense ratios of mutual funds.
Risks: When you opt for a direct SIP, you are the one making the decision of which scheme to invest in. While it offers flexibility, it also raises the danger you are exposed to if you are relatively new to investing. In regular plan SIPs, on the other hand, you have the guidance of the third-party such as the broker who offers you schemes based on your financial profile.
Expense ratio: The expense ratio is the percentage of daily net assets used by mutual funds to cover operating costs. Numerous expenses are incurred each year for administration to the agents and distributors, fund management, commissions, and promotion. The operational costs of direct plans are cheaper than those of regular plans since fund firms are not required to pay any commission to distributors selling direct plans.
So, which should you opt for? Regular SIP or direct SIP? That depends on what you feel comfortable with. If you are a Do-It-Yourself (DIY) investor and do not require the assistance of financial advisors in mutual fund transactions, then you can opt for direct plans. However, if you want assistance with investment decisions, such as whether to invest in equity, debt funds, or hybrid funds, what scheme to invest in, etc., portfolio monitoring, and other things, you should consider opting for regular plan SIPs.