Is a magnetic compass required for VFR (day) flight in powered aircraft?
The phrase &quot;magnetic direction indictor&quot; is interpreted as &quot;magnetic direction-indicator&quot;, not &quot;magnetic-direction indicator&quot;.
You need a device based on magnetism that indicates your direction. That could be a floating-card type compass, or a fluxgate compass, for example.
Some interpretation of this phrase is given in AC 23.1311-1C section 8.8:

Under VFR operation, part 91, § 91.205, requires a magnetic direction indicator (that is normally intended to be a compass) for heading information.
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Section 23.1303(c), Amendment 23-62, amended the requirement from “A direction indicator (non-stabilized magnetic compass)” to “A magnetic direction indicator.” As new technology becomes more affordable for part 23 airplanes, many electronic flight instrument systems will use magnetically stabilized direction indicators (or electric compass systems) to measure and indicate the airplane heading to provide better performance.
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Part 23 does not prescribe specific accuracy requirements for magnetic gyroscopically stabilized heading systems. Specific accuracy requirements for avionics may be found in the related TSO and, as acceptable means of compliance to § 23.1301, in ACs, notices, or policy statements/letters.

Further, installation of the magnetic direction indicator is regulated by §23.1327:

Each magnetic direction indicator must be installed so that its accuracy is not excessively affected by the airplane’s vibration or magnetic fields.