Index Fund Corner
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| Scheme Name | 1-Year Return | Invest Now | Fund Category | Expense Ratio |
|---|---|---|---|---|
| Axis Nifty 50 Index Fund | +32.80% | Invest Now | Equity: Large Cap | 0.12% |
| Axis Nifty 100 Index Fund | +38.59% | Invest Now | Equity: Large Cap | 0.21% |
| Axis Nifty Next 50 Index Fund | +71.83% | Invest Now | Equity: Large Cap | 0.25% |
| Axis Nifty 500 Index Fund | — | Invest Now | Equity: Flexi Cap | 0.10% |
| Axis Nifty Midcap 50 Index Fund | +46.03% | Invest Now | Equity: Mid Cap | 0.28% |
Understanding the basics
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. The goal is to generate returns for investors by leveraging the expertise of fund managers. When it comes to investing in mutual funds, individuals can opt for either regular plans or direct plans. The primary difference between the two lies in the route through which the investment is made and the associated costs.
In a direct plan, investors purchase mutual fund units directly from the Asset Management Company (AMC) without involving intermediaries. Conversely, in a regular plan, investors buy units through distributors or brokers, who typically earn a commission for facilitating the transaction.
The key difference is cost structure
The most significant difference between regular and direct mutual funds is the expense ratio. The expense ratio is the fee charged by the AMC to cover the costs of managing the fund, including administrative costs, management fees, and other operational expenses.
In a direct plan, since there is no intermediary involved, the AMC does not need to pay distribution commissions. As a result, the expense ratio is lower, allowing a larger portion of the investment to work towards generating returns.
Returns: impact of lower expense ratio
The lower expense ratio of direct plans often translates into better returns for investors, especially in the long run. Over time, even small differences in expense ratios can significantly impact the value of the investment due to compounding. For instance, if two plans – one regular and one direct – both earn 10% returns, but the regular plan charges an expense ratio of 1%, and the direct plan charges 0.5%, the difference in returns over the long term could be substantial.
Also Read : Understanding expense ratios: How mutual fund costs affect your returns
The case for regular plans
Despite the lower cost structure of direct plans, regular plans offer certain advantages for novice investors. One of the key benefits of regular plans is the added layer of guidance and support from financial advisors or distributors. Investors may find it easier to navigate the complex world of mutual fund investments with the help of a professional who can offer personalised advice based on their financial goals.
Tax considerations and transparency
Another point to consider when deciding between regular and direct plans is the tax treatment. The tax implications of investing in either plan are identical, as the underlying mutual fund structure remains the same. Both regular and direct plans are subject to capital gains tax, depending on the holding period and the type of fund (equity, debt, etc.).
Both options also offer transparency in terms of performance reporting, allowing investors to track their investments and assess returns over time.
Which plan is right for you?
The decision between regular and direct mutual funds depends largely on the investor’s experience, goals, and preferences. Direct plans are better suited for experienced investors who are comfortable making decisions on their own and are looking to minimise costs for long-term growth. These investors can potentially benefit from higher returns due to the lower expense ratio.
On the other hand, regular plans may be more appropriate for those who prefer professional guidance, are new to investing, or wish to avoid the time-consuming task of selecting and managing investments independently.
Also Read: Mutual funds redemption guide: Timing and when you can exit
