Direct mutual funds can help investors save on expenses compared with regular plans. Understand the cost difference, potential long-term savings and how the November 1 change affects your SIP investments.
Direct mutual funds can reduce costs and help you grow your wealth over the long term.
If you plan to invest in mutual funds through SIPs, there is one small change from November 1, which can make a huge difference for your future savings. According to SEBI, direct mutual fund plans have been made the default option on the digital platforms of Asset Management Companies (AMCs). But what is the importance of this, and how much can you save? Let's see through an example.
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What Is Changing From November 1?
As per the new change, when investors visit the AMC website or application, the mutual funds will be selected by default as direct mutual fund plans. For those who opt for regular plans, they will be informed that they come with higher expenses.
Both the direct and regular plans invest in the same stocks and bonds and have the same fund manager. The only difference between them is the expense ratio.
The direct plan does not include distributor commissions, thus being more affordable.
How Much Can You Save?
Suppose Amit has invested Rs 5,000 per month in a mutual fund through SIP for 20 years.
- Total investment by Amit = Rs 12 lakh
- Let us further assume that the direct plan earns an annual return of 12%, whereas the regular plan earns 11%.
- Direct plan = Approximately Rs 49.5 lakh
- Regular plan = Approximately Rs 43.5 lakh
- Difference = Rs 6 lakh
It is a huge difference when investing the same amount every month. The above numbers are only indicative and not guaranteed.
Should You Choose Direct Funds?
Direct plans would be suitable only if you are aware of mutual funds and can make your own choices. On the other hand, if you require some advice from a professional, even regular plans might be considered.
SEBI's move makes investing costs more transparent. Before starting your next SIP, compare both plans carefully. Remember, saving on expenses can help grow your wealth, but choosing the right fund matters just as much.
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