Direct Vs Regular Mutual Funds: Which Are Better?

Mutual funds have become very popular for people who want to grow their money smartly. Investing in mutual funds works by pooling money from different investors who wish to invest in similar opportunities. Experts look after these funds and spread the money across various types of investments depending on the type of the Mutual Fund. They may invest in bonds, stocks, exchange-traded funds (ETFs), and government securities. 

There are two major types of mutual funds - direct and regular. Direct plans let you invest directly with the fund house while regular plans involve an intermediary like an agent or a broker. 

Direct plans have gained popularity during the last decade due to their low expense ratio and higher returns in comparison to regular mutual funds. According to a report from AMFI, the contribution of direct plans to the total Assets Under Management (AUM) is 45%¹. The major contribution i.e. 55% of the total investment is still coming from regular plans due to the different benefits that regular plan brings to the investors. Additionally, there is one more category of funds called exchange-traded funds (ETFs). These funds require less management as most of the ETFs are managed passively. You can buy or sell an ETF anytime during market hours through the stock exchange and thus it offers more flexibility and liquidity.

Each type has its advantages, depending on your financial goals. Let us delve deeper into the concept of direct and regular mutual funds in this blog. 

Overview Of Direct Mutual Funds

Direct mutual funds are investment options offered directly by the fund company or asset management company to investors. Investors can buy these mutual fund direct schemes without using intermediaries like financial advisors or brokers. This means they do not pay commissions or fees to third-party intermediaries making the cost lower than regular plans. 

The expense ratio, which is the fee for managing the fund, is also reduced in direct plans. 

Direct Mutual Funds Benefits 

• Low Expense Ratio - Direct mutual funds have lower expense ratios compared to regular funds because they do not pay commissions to agents. 
• Higher Net Asset Value (NAV) - There are different expenses that fund houses have to bear to manage the fund in the case of regular plans such as administration, marketing and distribution. If you are investing in a direct plan, these expenses are removed leading to a higher NAV. In direct plans, all your capital is used towards investment in the plan.
• Better Returns Due To Low Expense Ratio - With lower expense ratios and no commissions or brokerage fees, direct mutual funds often yield slightly higher returns than regular funds. You will get more profits on your investment.

Overview Of Regular Mutual Funds 

Investors can purchase regular mutual funds through intermediaries like brokers or financial advisors. They provide services like investment advice and maintaining your portfolio. They can also help you with transactions. 

When you buy a regular mutual fund, the fund company pays a commission or fee to the intermediary. This makes the cost of these mutual funds a bit higher comparatively. As a result, the absolute returns you get from regular mutual funds might be lower than those from direct ones. 

Benefits Of Regular Mutual Funds

• Financial Advisor Assistance - Regular mutual funds offer guidance from financial advisors. They help you choose suitable funds based on your risk tolerance and investment objectives, making them great for new investors needing initial directions.
• Constant Portfolio Performance Monitoring - The professional keeps an eye on your portfolio's performance and suggests changes if needed. You would not have to deal with constant market monitoring. 
• Personalised Investment Planning And Strategising – Your financial advisor or distributor assists in creating a customised investment strategy matching your financial goals. It helps you navigate market fluctuations and stay focused on long-term objectives.

Direct Vs. Regular Mutual Fund Plans

How To Recognise If A Mutual Fund Is Regular Or Direct

Many investors get confused to differentiate between direct and regular funds. They end up making potential mistakes in selection. Here are key indicators to help differentiate between regular and direct funds - 

• Expense Ratio - Compare the expense ratios of both types of plans. Regular plans have higher expense ratios than direct plans.
• Fund Name - Regular mutual funds usually have the word 'Regular' or 'Reg' in their name, while direct mutual funds include 'Direct' or 'Dir' in their name.
• Consolidated Account Statement - Check your CAS to determine if a mutual fund is regular or direct. Look for the 'Advisor' field. You will see 'ARN' followed by a number in this field in regular plans.

Conclusion

The choice between direct and regular mutual funds depends on what suits you the best. If you are experienced and know the market well, direct funds might be the way to go. But if you are new to investing in mutual funds, regular mutual funds offer added services and convenience. 

Your advisor will keep an eye on your investment’s performance while you pay a fee for this convenience.

The ultimate goal of investing in mutual funds is to diversify the risk of investment and achieve stable returns. Investing in fixed-income securities like corporate bonds and securitised debt instruments also does the same. To learn more about fixed-income securities for diversification, explore Grip Invest.

Frequently Asked Questions On Direct Vs Regular Mutual Funds

1. Which is a better mutual fund option: direct or regular?

The choice between direct and regular mutual funds hinges on individual needs. Direct plans offer higher returns with lower costs but require self-research. Regular plans offer advisor guidance but come with higher fees.

2. What are the downsides of direct mutual funds?

Direct mutual fund investors may rely solely on past performance, neglecting other factors that may affect their returns negatively. They must monitor their portfolio regularly and make adjustments based on market conditions and financial goals.

3. Why direct mutual fund is a better option than a regular mutual fund?

Regular mutual funds have a higher expense ratio because of commissions and brokerage, resulting in lower NAV compared to direct plans. Direct plans offer higher returns due to their lower expense ratio.

References

1. cafemutual <https://cafemutual.com/news/industry/19110-proportion-of-direct-vs-regular-is-4555-in-mf-industry>

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