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Is it prudent to invest in direct plans?

Direct plans do not declare dividends like regular plans because they do not have sufficient realised gains with them

The NAV of the regular dividend plan is far less (almost ₹6) than direct dividend plans. The reason behind this is that regular plans have given dividends amount to ₹6 whereas not a single dividend has been declared by direct plans. Against this background, I want to know whether it is prudent to invest in direct plan at this juncture? If invest in them, I will get far less units in comparison to the number of units in a regular plan.
- Vijay Khosla

It is always better to invest in direct plans because they help you to save money on commissions and the savings invested elsewhere will help you to generate extra returns over a long period.

Having said that let us address the issue of dividends or lack of them in direct plans. Direct plans do not declare dividends like regular plans because they do not have sufficient realised gains with them. Mutual funds can pay dividends only out of realised gains (or distributable surplus). Funds used to pay dividends from their premium reserves earlier, but Securities and Exchange Board of India (SEBI) in March 2010 has asked them to pay dividends only from the realised gains made on their portfolio. This means regular plans that have been around for a long time and with large corpus can declare more dividends. In comparison, direct plans have been around only since 2013 and they do not have huge realised gains to distribute huge dividends among investors.

Two, do not confuse NAV of a scheme with the price of a stock. The price of a stock may be higher or lower than its real value. However, the NAV of scheme reflects the prevailing value of all its investment. Therefore, a higher NAV just tells you that the scheme's investments have appreciated in value. The higher or lower NAV or the resultant higher or lower number of units do not indicate the return potential of the scheme. The return potential depends on how the fund has invested its corpus. The only use of the NAV of a fund is to refer to its own past, which is how you figure out the returns of a fund. Comparing the NAV of one fund to another--which is a common enough activity among investors and fund salesmen--is worse than useless. It's a source of bad investing decisions. For more information, read: Misconceptions about the very basics.

The basic rationale behind investing in direct plans is very simple. Direct plans helps you to save money on commissions. The money is invested and it will result in extra returns over a long period.

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