Switch from Regular to Direct Mutual Funds — Here’s why
Mutual fund schemes are offered in two variants i.e. a regular plan and a direct plan, and you may wonder what is the difference between the two, and which plan would give you more benefits.
To overcome this dilemma, let us look at the concept of direct plans and understand why you should switch from regular to direct plans of mutual funds.
How are direct plans different from regular plans?
A direct plan differs from a regular plan with respect to the expense ratio. The expense ratio of a direct plan is lower as compared to the regular plan. Let’s look at why this happens.
When you invest in a direct plan, you invest directly with the AMC (Asset Management Company). On the other hand, in the case of a regular plan, there is a bank or a distributor between you and the AMC. The bank or a distributor charges a commission to provide these services which get added to the expense ratio of a regular plan; making it higher than that of a direct plan.
A higher expense ratio creates a higher charge on the NAV of the fund. This, in turn, results in a lower return on investment. So, switching to direct plans of mutual funds helps you to earn higher returns as compared to regular plans.
What is a SWITCH and how does it work?
When your aim is to maximize your returns you should invest in a plan which benefits you the most. For this to happen, you should switch your mutual fund investments from regular to direct mode.
In general, a switch means moving out from a regular plan of a scheme and investing in a direct plan of the same scheme. The whole transaction involves two actions namely:
- Redeeming units of the regular plan
- Buying units of the direct plan
However, a switch will not change other features of the underlying scheme like the investment objective, portfolio composition, and the fund manager — these remain the same.
At Paytm Money, you can easily move your mutual fund investments from the regular to the direct mode using our ‘Switch’ feature. In this way, you can earn up to 1% higher return on investment on our online platform.
How much extra returns do you earn after you SWITCH to direct plans?
The mutual fund returns given in your investment statements are shown after deducting the expenses. It means that before considering the expense ratio, the returns generated by a regular plan are the same as that of a direct plan. However, due to a higher expense ratio, the regular plan delivers a lower return on investment. On the other hand, direct plans being cost-effective, produce higher returns.
Let’s see the effect of the expense ratio on your returns in the following table.
Conclusion
For better returns SWITCH to direct plans today and watch your wealth grow faster. If you have not yet started investing, then download the Paytm Money app and start investing within minutes.
