WHAT ARE MUTUAL FUNDS DIRECT OR REGULAR PLANS

What are mutual funds and why lots of people talk about mutual funds to invest in ?

First let us know what is mutual fund actually is with the help of the given example -

Let us suppose that  "X PRIME SECTOR " is a mutual fund.

Now, we have seen markets in news very often about Sensex and Nifty. ( These are the index over which Various stocks are listed ).

Let us suppose that there are 4 stocks listed on NSE as below -

STOCK NAME                     STOCK PRICE
A                                                60
B                                                120
C                                                450
D                                                150

Now fund  "X PRIME SECTOR " has invested in these 4 stocks 25%f each. ( Its just an example to explain you about mutual fund investments )

So, for a moment if you invest INR 10000/- in  "X PRIME SECTOR " fund then, fund will invest your INR 10000/- into four splits of 2500/- in each stock.

Now as per the gains or losses of your stock you will get profit or loss.



It was just an example.

Now I tell you major types of mutual funds.Again let us say "X PRIME SECTOR " fund.

Mostly all mutual funds have 4 types -

1.  "X PRIME SECTOR " fund REGULAR, GROWTH
2.  "X PRIME SECTOR " fund REGULAR DIVIDEND
3.  "X PRIME SECTOR " fund DIRECT GROWTH
4.  "X PRIME SECTOR " fund DIRECT DIVIDEND

We always want the Grass more Greener

So, whats the difference in above 4 mentioned types.

Before moving ahead learn about Expense Ratio. Expense Ratio means what a fund house will charge you for managing your fund, In regular plans expense ratio is higher in comparison with direct plans. 

Expense ratio is 2 - 3 % in Regular plans and 1 - 2 % in Direct Plans. ( % amount you have invested )

You will always see any plan marked as  "Regular or Direct " and  "Growth or Dividend ". You always need to choose a plan as Whether Regular or Direct and then whether Growth or Dividend.

Below are the explanations : -

REGULAR PLAN 

    Regular Plan means there are 3 parties - You, Your fund house &  A Broker in between you and your fundhouse.

Obviously, you are going to pay to your fund house and a broker, hence more charges.

DIRECT PLAN

   In Direct Plan you buy fund directly from the fund house, so low expense ratio.

REGULAR PLAN GROWTH

   It means whatever profit your fund will earn will be kept invested till you redeem your bought fund. Hence your capital will grow faster. But your broker and fund house will take commissions in the form of expense ratio.

REGULAR PLAN DIVIDEND

   It means whatever profit your fund will earn will be deposited to your bank account in some periodic cycles . Hence your capital will not grow faster. Also, your broker and fund house will take commissions in the form of expense ratio.

DIRECT PLAN GROWTH 

&DIRECT PLAN DIVIDEND  are also there but these are cheaper because you buy them directly from the fund house. 

In next topic we will learn how to choose mutual fund for investment.