A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What is a direct plan/regular plan?
All mutual fund schemes offer two plans- Direct and Regular. In a direct plan, an investor must invest directly with AMC, without any distributor to facilitate the transaction. In a regular plan, the investor invests through an intermediary such as a distributor, broker or banker who is paid a distribution fee by the AMC, which is charged to the plan.
Therefore, the direct plan has a lower expense ratio
as there is no distribution fee, while the regular plan has a slightly higher expense ratio to account for the fee paid to a distributor to facilitate the transaction.
Managing an MF scheme involves costs and expenses, such as fund management fees, sales and distribution expenses, custody and registration fees, etc. All these expenses are covered by the expense ratio of the fund. These costs are within the limits prescribed by the regulatory authority – SEBI.
Therefore, if an investor chooses to invest directly through the direct plan, he could get a slightly higher return due to the savings in expenses, but he would not be able to avail himself of the distribution and related services of an intermediary.