Understanding The Disadvantages Of Direct Plan Mutual Fund: Mutual funds are financial products that are professionally managed by finance experts. Mutual funds provide novice investors an opportunity to participate in the financial markets. These investment products are ideal for investors who want to be a part of investing community but do not have the time and knowledge to trade in the stock market.
What is a direct plan mutual fund?
Mutual funds are presently one of the most popular investment vehicles for investors. Experts believe that first-time investors should always start their investing journey with the help of mutual funds.
Advantages of investing in mutual funds include advanced portfolio management, dividend reinvestment (if you choose this option), risk reduction, diversification, etc. Mutual fund investments can be done through 2 modes: A regular plan and a Direct plan.
A direct plan is when you buy directly from the mutual fund company. This can be done by visiting their website or by physically visiting their office. On the other hand, a regular plan means buying with the help of an advisor, broker, or distributor (intermediary). While you might have heard that investors should go for a direct plan, there are certain disadvantages attached to it.
This article will walk you through the disadvantages of direct plan mutual fund. By the end of this article, you will have a fair idea as to why going for a regular plan will benefit, you and why beginners (in particular) should go for a regular plan.
Disadvantages of direct plan mutual fund
1. Selection of schemes might be difficult
There are several mutual fund schemes that are offered by various asset management companies in India. Therefore, investors tend to get confused in selecting one scheme from a range of schemes. More often than not, direct investors invest their hard-earned money on the basis of the past performance of one particular scheme without examining other factors.
Investments should never be made solely on the basis of past performance only. Since investing in mutual funds will expose investors to market-based risks, other factors should also be taken into consideration. Novice investors will find it difficult to judge these factors. Therefore, investing through a direct plan might put their capital at risk.
2. Decision Making
The investment portfolio of the investor should be monitored on a regular basis, and suitable alterations are required depending on market conditions. However, direct investors might not be aware of the suitable time to make amendments. Equity markets are dynamic and these markets are sensitive to several economic factors.
Any sort of data-related information can impact the stock market and the performance of the mutual fund scheme. The idea behind investing in a mutual fund is wealth creation. However, inappropriate, and late decisions can impact the journey of wealth creation in the long run.
Direct investors into mutual funds can develop particular biases, and these can impact their investment portfolio. For example, investors might concentrate on similar categories of funds. They might develop a liking for a certain category of funds and continue to invest in those funds.
Therefore, they tend to ignore the mechanics behind the mutual fund scheme. Biased investment decisions can impact the returns over the long run and an investor might end up making negative or fewer returns.
4. The appropriate time for redemption
All the investment decisions and completion of the formalities are to be done by the investor in a direct plan. Buying a mutual fund scheme directly from the company means you are eliminating the intermediary or adviser. Therefore, buying a direct plan will deprive you of having a mutual fund advisor.
As a result, investors cannot approach a mutual fund advisor for help. Right from completing the forms to making the redemptions—the entire process has to be completed by the investor. What most people forget while starting their mutual fund investments is they cannot withdraw the full amount upon maturity without paying a heavy tax. This is one of the biggest disadvantages of Direct Plan Mutual Fund.
This is the main reason why novice investors opt for regular plans instead of direct plans. Redemptions are to be carried out after analyzing the range of factors such as sectoral performance, allocation to a particular industry, etc.
5. Complex information
Investments into mutual funds are required to be made after understanding the basics of a scheme. For example, there are schemes having a lock-in for a certain amount of time, say 3 years. Secondly, what are the returns expected after the lock-in period? There are mutual funds that charge an exit load if redemption happens before a certain period of time.
All these factors should be examined. A first-time investor might be unaware of the lock-in period and might get the capital stuck. Mutual fund advisers can give investors a fair idea about the returns after the lock-in period. He/she can invest according to their goals. Therefore, involving a mutual fund adviser might help you to understand the complexities of investing in a mutual fund.
Are Direct Mutual Funds Better Than Regular Mutual Funds?
Though it has its own disadvantages, direct mutual funds are better than regular mutual funds in certain ways. As Direct mutual funds do not involve any third parties, there is no need to worry about paying commissions, which makes it cheaper than regular mutual funds. Direct plans are also recommended in the long run as they earn better returns than the regular plan.
As a first-time investor, you might not have the time required to regularly review the investment portfolio and make changes according to the market dynamics. This might impact the returns over the long term. There are other things to be considered before investing in a mutual fund.
These include the age of the fund, the fund house’s reputation, financial ratios, etc. A professional understanding of finance is required to get these things right. Thus, beginners might risk their capital.
In the end, the plan that works for you depends on the investment style. However, if you are not capable of doing the due diligence before investing in a particular scheme, consider going for a regular plan instead of a direct plan.
So, that’s all for the article on Disadvantages Of Direct Plan Mutual Fund, We hope you enjoyed reading it. Happy Investing!
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