Module 6: How to Invest
Topic: Direct vs Regular Plan
You can choose to invest in Mutual Fund schemes in two ways –
- Directly from the AMC → Direct Plan
- Via a distributor → Regular Plan
When you buy from the AMC/fund house directly, there is no distributor, hence no distributor commission, and therefore lesser expense ratio. If you are comfortable managing your Mutual fund investments independently, then it may be better off investing in a direct plan and saving on costs.
When the scheme is sold through a distributor, he/she needs an incentive to sell the mutual fund scheme; hence the AMC marks up the expense ratio and passes the additional expense to the distributor. Hence, for any given mutual fund scheme, the expense ratio for a regular plan will always be higher than the direct plan. If you have a trusted relationship with a distributor, you may consider opting for a regular plan. While distributors cannot provide investment advice, they may help facilitate your investments and may offer support in tracking your investments and mutual fund performance.
Growth vs Dividend Options
Every mutual fund scheme that you would have seen may have two options such as:
- Dividend Option: This option involves returning a part of the profits earned from your invested amount back to you as dividends.This is ideal for investors who look for a regular income from their investments. The dividend payouts may provide a steady stream of income but are also taxed.
- Growth Option: In the growth option, you do not receive any dividends. The profits earned are invested back into the scheme and therefore there is scope for your money to grow. It may be suitable if you are a long-term investor focused on wealth creation.
Key Takeaway:
For any given scheme the TER or the expense ratio for a regular plan will always be higher compared to the direct plan.
Task:
Check the plan option that you have invested in. Is it a direct plan or regular plan? Is it a growth option or dividend option?
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
An Investor education and awareness initiative by Zerodha Mutual Fund.
