Investing, at times, can be likened to solving a Rubik’s cube puzzle, especially when the point in consideration is how to achieve maximum returns on investments made. One piece of this puzzle that is often neglected is the decision between choosing direct plans of mutual funds or regular ones.
If you are used to self-investment and willing to try out the research needed, direct mutual funds seem to be a suitable option to maximize your returns. In this article, we will look at what are the benefits of investing in direct mutual funds. We will also cover how it works and what it could mean in monetary terms.
Understanding Direct vs. Regular Mutual Funds
Let’s start with the important distinctions between direct and regular mutual fund plans. Both invest in the same investment portfolio overseen by the same fund manager. The main feature that makes them different is the distribution and the associated charges.
Regular plans are made available through middlemen who are distributors or financial advisors. These middlemen are paid commissions that are included in the funds’ expenses. On the other hand, direct plans are bought directly from the fund house without the other parties and stamp cost.
Here is where the earning of an extra 1% at different expenses comes from.
The Math Behind the 1% Advantage
Direct plans can offer higher returns mainly because of their lower expense ratio. The expense ratio is the yearly fee the mutual fund charges to cover operating costs, including management and administrative expenses.
Let’s look at an example:
- Regular Plan: Expense Ratio: 2%
- Direct Plan: Expense Ratio: 1%
In this case, the direct plan has a 1% lower expense ratio. This 1% difference directly translates to potential additional returns for you as an investor.
Over time, this small difference can have a big impact due to compounding. For instance, if you invest ₹10,000 monthly for 20 years, assuming an average annual return of 12% (before expenses):
- Regular Plan (2% expense ratio): Final amount: ₹1,18,60,523
- Direct Plan (1% expense ratio): Final amount: ₹1,32,49,389
Difference: ₹13,88,866
That’s nearly ₹14 lakhs more in your pocket simply by choosing the direct plan!
How to Invest in Direct Mutual Funds?
Now that we understand the potential benefits, how can you access direct mutual funds? Thanks to technology, investing in direct plans has become much easier.
One of the most convenient ways to invest in direct mutual funds is through a mutual fund app. These apps provide a user-friendly platform for researching, comparing, and investing in a wide range of direct mutual fund options. They often offer features like paperless KYC, easy portfolio tracking, and systematic investment plans (SIPs).
When using an app, you can explore various fund categories, including those that invest in bluechip companies.
Investing in direct plans of mutual funds that focus on these companies can offer a balance of growth and stability while benefiting from lower expense ratios.
Considerations for Investors to Invest in Mutual Funds
While direct plans offer clear cost advantages, it’s important to consider your circumstances:
- Research responsibility: Without an advisor, you’ll need to do your research and make investment decisions.
- Asset allocation: Ensure you maintain a balanced portfolio aligned with your risk tolerance and financial goals.
- Regular monitoring: Keep track of your investments and rebalance when necessary.
- Tax implications: Understand the tax treatment of your investments and any implications of switching from regular to direct plans.
Conclusion
Investing in direct mutual funds can be a smart way to keep more of your returns working for you. By understanding the benefits and considering your financial situation, you can make informed decisions that help you work towards your long-term financial goals.
Last Updated on by Icy Tales Team