The Smart Switch for Higher Returns
Free Book Preview Money-Smart Solopreneur
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
Mutual fund investments have emerged as a favoured option to achieve that goal, as they offer high returns and are appealing to younger professionals, who are not risk-averse. However, it is difficult to find credible sources of information and insights related to mutual funds to ensure the returns correspond to the expectations people have from mutual funds. For instance, most people who have opted for mutual funds do not know the difference between direct and regular mutual fund plans, which can have a significant impact on the cost of investment in a fund, ultimately impacting the returns an investor earns.
A Mutual Fund-Direct Plan is what you invest in, directly from the mutual fund company or through platforms which help investors to invest in direct mutual funds, whereas, a Mutual Fund-Regular Plan is what you invest in, through an agent, broker or a distributor. When an investor invests in a Mutual Fund-Regular Plan, the mutual fund company is required to pay a commission to the intermediary. It is then recovered as an expense from the investors, which makes the expense ratio of regular mutual funds plans higher.
The Securities and Exchange Board of India (SEBI) introduced direct mutual fund plans in January 2013, which made it mandatory for all Asset Management Companies (AMCs) to provide an option to invest in mutual fund schemes directly, without the involvement of any third party.
What Does This Mean to You as an Investor?
An investor can earn approximately 1.5per cent higher returns by investing in direct plan mutual funds. Asset Management Companies (AMC’s) provide investors with two mediums to invest in Mutual Funds: Regular Plan and Direct Plan. The regular plans charge around 2.5per cent as annual management fee or in mutual fund terms, Expense Ratio, on the investment value. Of this, 1-1.5per cent is claimed as a commission by the agent or distributor, while the remaining 1per cent goes as a Management fee to the AMC. The direct plans have no reason to charge the agent commission of 1-1.5per cent, which enhances the returns of the investors.
Which Mutual Fund Plan Then, is Most Suitable?
Regular and Direct plans are just the two options of the same mutual fund scheme, run by the same fund managers who invest in the same stocks and bonds. The only difference between the two is that in case of a regular plan, the AMC or mutual fund house is required to pay a commission to an intermediary as distribution expenses or transaction fee out of the investment made by the investors, whereas, in case of a direct plan, no such commission is charged.
Instead, in case of 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.
A high expense ratio eats directly into your returns and will reduce the wealth-creating potential of the fund.
How to Make the Switch From Regular to Direct Plans?
There are two options which would help you to switch from Regular Plan to a Direct Plan and maximize your return on investments. The first option is a bit tedious, as it involves diluting all your investments in Regular Plan Mutual Funds and starting a fresh investment in Direct Plan Mutual Funds.
The second option is quite simple. Some third-party mutual fund dedicated platforms offer users an option to make the transition. For instance, Piggy, an AI-driven Mutual Fund Application provides a Smart Switch option to all its users. The option allows users to switch from Regular Plans of any mutual funds to Direct Plans of the same mutual fund seamlessly.
Smart Switch is an algorithm, which prepares a smart schedule in order to optimize your returns. It prepares a schedule and provides you with a stipulated date, on which you can choose to switch your investment to Direct Plans without being liable to pay exit loads, and optimizes your tax savings. This option allows you to switch from Regular Plans to Direct Plans within a few minutes.