Should You Invest in Direct Plan or Regular Plan for Hybrid Schemes?

Should You Invest in Direct Plan or Regular Plan for Hybrid Schemes?

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There are schemes that offer high interest rates, but that should not be the only for investing. Does the term ‘financial planning’ confuse you? Financial planning my sound complex, but it is just basically determining your life’s short term and long term financial goals. Financial planning and investment planning go hand in hand. Goal based investing seems to work in the favor of investors. When you exactly know what you want to achieve in the long run, you can plan your investments accordingly.

Mutual funds are a pool of professionally managed funds that invest across asset classes. Depending on the nature of the scheme, its investment objective and asset allocation strategy a mutual fund may invest across various asset classes and money market instruments. For example, a large cap fund’s investment objective is to achieve long term capital appreciation by investing in across the large cap market. A liquid fund on the other hand invests in fixed income securities and its investment objective is to offer stable returns with minimum investment risk.

Similarly, hybrid funds are open ended equity instruments that generate capital appreciation over the long term by investing across equity and debt asset classes. There are several schemes under hybrid fund whose asset allocation strategy varies depending on the nature of the scheme. For example, an aggressive hybrid fund’s investment objective is to achieve long term capital appreciation by predominantly investing in equity and the remaining in debt asset. On the contrary, the investment objective of a conservative hybrid fund is to earn capital appreciation by predominantly investing in debt and allocating the rest to equity. Hybrid funds are known to carry a balanced investment portfolio, hence the term balanced funds.

What are direct and regular plans?

All mutual fund schemes have two plans – direct and regular. In a direct plan, the allotment of units happens directly from the AMC. Direct plans generally don’t involve third party distribute to regulate transactions made through direct plans. They also have a low expense ratio since there is no third party involved in the functioning of a direct plan.

A regular plan on the other hand is available for purchase with a third party aggregator like a mutual fund broker, an agent or any other SEBI registered distributor. The AMC have to pay a distribution fee to the third party for selling the mutual fund scheme. This commission is recovered by the agency by levying a high expense ratio on the direct plan which the investor has to bear.

Should you invest in a direct plan or regular plan?

Although regular plans have a high expense ratio, they receive guidance and investing tips from the agent or broker from whom they purchase the plan. This privilege might not be available for direct plan investors. However, since you will be investing in a hybrid scheme over the long term, the plan with a high expense ratio is bound to eat up your long term capital gains. The expense ratio may seem negligible at the time of investing but over the long term it will affect your wealth creation.

Investors who do not need guidance in assessing their portfolio, such individuals can opt for a direct plan.  However, if you are new to investing and feel that you might not be in the position to handle your investments, you can opt for a regular plan. If you need help in picking the right scheme but do not want to invest in a high expense ratio bearing scheme, you can consider seeking professional consultation.

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