A mutual fund is the trend of investment in recent days despite being subject to market risks. The mechanism of this investment fund is to pool money from many investors, retail or institutional, to purchase securities. Plans of this investment fund are generally of two types – direct and indirect or regular.
Securities and Exchange Board of India (SEBI) mandated mutual fund distributors to offer direct fund schemes in 2012. From 1st January 2013, the mutual fund houses have launched direct plans for all open-ended schemes. Direct plans are in existence for almost 6 years in India and are finely co-existing with the other regular or indirect plans.
For an investor, sometimes it is really confusing about where to invest. There are nearly two thousand mutual fund schemes, and with the emergence of direct plans, more choices are available to invest in mutual funds. Therefore, it’s really necessary to understand the difference, benefits, and risks associated with the plans prior to your investments.
As the name suggests, a direct plan is a direct option made to investors. They, therefore, do not have to go through any intermediaries like – advisors, mutual fund distributors or brokers. But, if one opts for any indirect plans, the investor needs to take assistance from any one of the above to make an investment. The plan type to be chosen depends on various factors that contain benefits and risks attached to it.
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Direct Vs. Indirect Plans: Benefits And Risks Attached
Ease Of Investment – If you want to invest in direct plans, you need to approach directly to the branches of fund houses. Or, you may visit their websites to do investments on your own. But for first-time investors and many others, this might not be an easy task. For them, they can call a mutual fund distributor, broker or advisor to take through the purchase process of any funds like – equity mutual funds. The intermediaries are available to assist the investors in picking the right product, filling and submission of forms and to provide receipts of acknowledgment. If you are a first timer, looking for this bit of help will be a wise decision. And, if you belong to the group of seasoned investors, go direct and manage your own portfolio all by yourself.
On-Time Service – If you are a direct plan investor, time to time review of your portfolio have to do all by yourself. In case of any confusion or clarity requirements, a branch visit is a must. On the other hand, for indirect plan investors, on time services are provided by your distributor or advisor. They are responsible to keep a keen watch on your portfolio and recommend desired changes if necessary. In case of clarity on products, your advisors or distributors and always there at your service.
Expense Ratio – Direct plans are charged lesser less than an indirect or regular plan. The investors get a difference of minimum 50 basis points. Comparatively, in indirect plans, fees are higher since you need to pay commission to your distributors for the services they offer to you.
Higher Net Asset Value – Direct mutual fund schemes get a relatively higher NAV or net asset value than an indirect scheme. Thus, this makes the valuation of direct investments better than that of any indirect plan scheme.
Risks – Direct schemes have risks attached to them. At times, it could be higher since investments are made completely based on own judgment and understanding. As these are non-advisory investment plans, investors tend to opt for comparatively higher risk when it comes to their portfolios. On the other hand, in indirect plans, advisors or distributors keep eyes on investors portfolio and recommends necessary changes to achieve financial goals.
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Given the above points, if you are a well-equipped investor with market know-how and have a good understanding of risks and rewards associated with mutual fund investments, only then direct plans should be opted. Investments made just by looking at lower fees, backed by no advice and experience, can prove to be disastrous at times. On the other hand, for investors who lack time in managing portfolios, it is advisable to choose a service-oriented investment approach via indirect plans.
