The mutual fund awareness campaign in India has been doing a tremendous job as the inflows in the equity mutual fund has been increasing at a great pace in recent months. AMFI launched the “Mutual Fund Sahi Hai” campaign to inform the mass about the benefits of mutual funds. But in many of the banners and advertisements, AMFI can be observed promoting direct plans over regular ones. No doubt direct plans will give you more benefits but for those making an investment for the first time that too in an aggressive scheme like L&T Emerging Businesses Fund, the direct plan can be hazardous. If you do not believe it, your thoughts might change at the end of this write-up.
What are Direct and Regular Plans?
Before moving any further it is important to clear the myths and confusion regarding direct and regular plans. Direct plans of mutual fund allow investors to invest on their own without the help or assistance of any external source. The investor needs to do all the formalities on himself and select the mutual fund scheme, tenure, amount everything on his own. On the other hand, if money is invested through an advisor or distributor after recommendation and suggestion, it is invested in the regular plan where a majority of the formalities are done by the registered mutual fund provider. Direct plans are advantageous in terms of returns by a slight margin as the expense ratio or the amount charged by AMCs is lower for direct plans compared to regular plans. The expense ratio generally differs by 1-1.5%.
Is it a Smart Move to Choose Direct Plans?
Direct plans certainly are a better choice to invest in mutual funds provided that you are well aware of every little aspect of mutual funds. To gain better returns from mutual funds through direct plans, you need to know which segment or category will be most suitable to achieve your objective. What would be more beneficial according to the trends in the market and what can be the probable outcome in the future. Apart from that, you should also keep an eye on your holdings to see if the portfolio needs any revamping on a regular basis. If you can guess everything on your yourself than choosing direct plans over regular ones is definitely a smart choice as investors can gain nearly 1% more returns on the invested amount. However, if you are blindly going for the 1% return without proper knowledge about investing in mutual funds, you might be putting your hard-earned wealth and your financial objective at a greater risk.
Read the article to know why choosing direct plans over regular plans of L&T Emerging Businesses Fund can be dangerous.
L&T Emerging Businesses Fund - Regular vs Direct
L&T Emerging Businesses Fund is a high-risk fund which might have provided better gains in the past but investing in the fund without prior knowledge about the scheme would be a mistake. Direct plans of high-risk funds should be avoided by those who lack basic knowledge about mutual funds. L&T Emerging Businesses Fund is a small-cap fund that invests in stocks of emerging businesses which are prone to frequent fluctuations. The fund has a high standard deviation and is ideal only for long term goals of more than 7 years. A trusted advisor can let you know whether the fund is ideal for you or not. The market conditions are also responsible for the performance of the scheme as for some rolling tenures, it has provided more than 70% returns in a year while the worst performance for a year is below 19% in negative. If you plan to invest in such volatile scheme without basic knowledge you may have to face fatal consequences.
Direct plans are better than regular plans only if you are well aware of every aspect of mutual funds. It is just like taking medicines on your own and taking prescriptions from a doctor. If you can select the most optimum medicines for yourself, you don’t have to pay to the doctor. But we don’t do that because we don’t want to take a risk with our health. So why do we take unnecessary risk in finances? Is it not important? However, paying a very little proportion to experts for rigorous efforts of research and analysis for your betterment is not a bad idea at all.