Why to invest in Direct Mutual Funds?

Describe the difference between Direct and Regular Mutual Funds?

On the behest of SEBI in 2013, it was made mandatory for the Asset Management Companies to offer Direct Mutual Funds in which investors can invest in the scheme without involving any brokers, agents or distributors. This resulted in the non-payment of any commission to the aforementioned entities.

From that period, the convoluted process of Mutual Funds was bifurcated into Regular & Direct Plans.

Being an investor, you can select the investment scheme according to your financial requirements, i.e., Regular or/and Direct Plan. Both plans seem identical: your money will be invested in the same fund, managed by the same fund manager, the fund will have the same risk. So, what's the difference between direct and regular mutual funds?

The critical difference is of the intermediary involved in both schemes.

1. Regular Mutual Fund plans have the middlemen (intermediary) in between the investors and Asset Management Companies (AMCs). This means that the investor has to pay commission or advisory fees to AMCs, which results in a rising expense ratio.
2. Conversely, Direct Mutual funds don't allow any middlemen (intermediary) in between the investors and Asset Management Companies (AMCs). In this plan, the investor doesn’t have to pay any brokerage amount which results in a lower expense ratio.

Reliance Money Manager fund with regular plan having expenses .55%, rated 2 stars and return since launch is 8.37% as of April 14th 2017 by valueresearchonline.

Where Reliance Money Manager fund with direct plan having expenses .23% rated 3 stars and return since launch is 9.13% as of April 14th 2017 by valueresearchonline.

In Regular plans, distributor charges commission of 1.5% (Approx), upfront, and 1%(Approx) every year from your investments. This commission will start from day one of your investment until you redeem your complete investment. So if you are SIP investor investing every month, then you are paying a very big amount as commission to your distributor.