Direct mutual funds vs regular mutual funds: Why one should switch from regular to direct

Mutual Funds: In a bid to save commission of around 1 per cent to 1.5 per cent being paid in regular mutual funds, market experts have been suggesting mutual fund investors to invest in the regular mutual funds and enhance their return by saving the commission that the AMCs have to pay from your returns. Introduced by the Securities and Exchange Board of India (SEBI) in 2013, direct mutual funds made it mandatory for all Asset Management Companies (AMCs) to provide an option to invest in mutual fund schemes directly, allowing them to avoid up to 1.5 per cent in commissions on the investment value. In fact, savings & investment apps are also adapting themselves to provide their users to switch from regular to direct mutual funds. 

Elaborating on the advantage of the switch feature, Nikhil Mantha, Co-Founder & COO at Piggy said, “The current procedure of making a switch to direct mutual funds is very tedious, as it involves selling all your investments in Regular Plan Mutual Funds and starting fresh investments in Direct Plan Mutual Funds. This prevents users from switching to direct even though the cost benefits are considerably higher. Through Smart Switch, an algorithm developed by Piggy, users of any mutual funds can shift to direct plans seamlessly. It prepares a smart schedule in order to optimize your returns. It also provides you with a stipulated date, on which an investor can choose to switch his investment to direct plans without being liable to pay exit loads, and optimizes your tax savings, all within a few minutes! And the whole process is completely automated and done at a click of a button.” 

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The major difference between regular and direct mutual funds lies in the commission charged. Both direct and regular mutual funds are two versions of the same fund, the difference being that one can earn more returns in direct funds by avoiding commissions. In the case of a regular plan, the AMC or mutual fund house is required to pay a commission to an intermediary as distribution expenses out of the investment made by the investors. In case of a direct plan, no such commission is charged. Instead, with Direct Plans, the commission is added to your investment balance, thereby reducing the expense ratio of your mutual fund scheme and increasing your return over the long-term. Direct mutual funds help investors achieve higher returns when compared to regular mutual funds. The returns in case of direct mutual funds are higher by around 1 to 1.5 per cent. 

A high expense ratio eats directly into your returns and will reduce the wealth-creating potential of the fund. The Smart Switch option helps users to make substantial savings, complete the transition quickly and even manage multiple switches easily by recording transition dates and incorporating retrospective effects. Smart Switch also considers various other factors to ensure the user is not liable to pay an exit load or break the lock-in the period of his ELSS investments.