Regular Vs Direct Mutual Funds: Which is Better?
Regular Vs Direct Mutual Funds: Introduction
Mutual funds were invented to ease the investment journey for investors who do not want to be bothered with the details. Investing in a mutual fund involves sending money to the fund and then you will have certain units in the fund and the moment you invest in a mutual fund, you get to be the owner of dozens of companies the fund has bought. It does not matter whether you have invested Rs. 500 or Rs. 5,00,000, you still own a piece of ownership of all the stocks the fund owns.
A mutual fund is managed by professional fund managers that pool money from several investors to buy financial securities such as stocks, bonds, money market instruments, and other securities. Mutual funds generally offer two plans- Regular and direct mutual funds. Both the mutual fund plans have their unique advantage and investors should be aware of these two plans to make an informed investment decision.
What are direct and regular mutual funds?
In 2012, SEBI initiated a direct mutual fund to allow investors to invest in mutual funds without the involvement of intermediaries. Direct mutual fund plans can be directly bought from the AMC (asset management company) and one can invest in direct mutual funds by visiting the AMC or visiting their website online or SEBI registered investment advisory (RIAs). There is no intermediary involved, investors do not have to pay brokerage and commission charges to the mutual fund. Hence, the scope for return increases because the expense ratio for a direct mutual fund is relatively lower than regular mutual funds. One can easily identify direct mutual funds as they have prefixed the word 'Direct' in their name.
Regular mutual funds are sold through third parties such as agents, brokers, distributors, and advisors. The third-party charges a certain fee to the fund house for selling their mutual funds and hence, regular mutual funds are a bit more expensive than direct mutual funds. The AMC retrieves these charges from the expense ratio. A regular mutual fund can be advisable for investors who are new to the world of financial markets as they get advice from expert and professional fund managers at a minimal fee.
Difference between regular & direct mutual fund
- Charges: In a regular mutual fund, commission for sales is paid to the broker who sells the mutual fund for the AMC and the percentage of commission can vary from 1%-1.25% a year. While in a direct mutual fund, no sales commission is charged on AMCs and this makes it more convenient for investors.
- Returns: Direct mutual fund offers a comparatively higher return than a regular fund because there are no intermediary charges involved in the direct mutual fund. Therefore, investing in direct mutual funds can help you generate more return on your investment.
- Usefulness: Choosing the right mutual fund is not easy as it seems. You need to understand your risk tolerance, investment goals, and time horizon, only then you can choose a mutual fund that fulfills your requirements and investment goals. Direct mutual funds can be preferable for those who know the basics of the stock market and have experience in investing in the stock market. On the other hand, for investors who do not have much time to research the market, a regular plan will do the work for them.
- Expert advice: A regular mutual fund provides you services from professional stock pickers to positively impact your portfolio. Whereas direct mutual funds do not provide any such services to investors and hence, they have to keep track of their portfolio regularly.
- NAV (Net asset value): A regular fund's NAV is comparatively lower than direct funds that is because a regular plan charges a high expense ratio from its investors whereas a direct mutual fund does not charge any management fee or commission from investors. Hence, Direct mutual funds have a lower expense ratio.
Mutual fund direct Vs Regular growth
| Particulars | Direct mutual fund | Regular mutual fund |
| third party | Not present | Present |
| Market Research | Self | Advisors |
| Expense ratio | Low | High |
| NAV | High | Low |
| Returns | High | Low |
| Investment advice | Not available | available |
Which is better direct or regular MF
Direct and regular mutual funds are handled by the expert fund manager and they invest in the same financial securities. Direct mutual funds are cheaper than regular funds as there are no intermediaries involved and they do not have to worry about paying commissions to third parties. Direct plans can be preferable for those who want to earn a higher return in the long term as they offer a decent return than the regular plan.
Opting for a direct mutual fund can seem to be a good deal if you are a well-informed investor and have experience investing in the stock market. On the other hand, if you are a beginner to the stock market and need expert advice from professionals to select the right mutual fund for you, then selecting a regular mutual fund will do the work. A financial advisor can save you plenty of time to plan your finances, understand your risk tolerance and help you to choose the right fund which suits your requirements.
Summing up, As an investor, you must be aware of the advantages and disadvantages of investing in regular and direct mutual funds. If you are a beginner in the stock market, you can start your investment journey by investing in a regular mutual fund and when you gain experience and knowledge in the stock market, you can switch to a direct fund. Before making any investment decision do your proper research and wisely use your hard-earned money.
Important things to remember:
1. Do Not Blindly Follow Hot Tips
No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly.
2. Eliminate Loser Stocks from Portfolio
There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses.
3. Don't Exceed Your Investment Budget Abruptly
While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares.
Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns
Direct growth Vs regular growth, what is the difference?
Direct growth can be defined as investing in the growth option of a plan with a direct plan and regular growth is investing your money in a growth option with a regular plan.
Direct plan Vs regular plan, which is better?
A direct plan is when you invest in a mutual fund directly from the mutual fund company through their online website or offline. And a regular plan is when you invest in a mutual fund through an intermediate like an investment advisor, broker, or distributor.
Regular Vs direct mutual fund, Which one should you opt for?
The fund management and portfolio are the same for both regular and direct mutual funds, if you are new to financial markets then you can opt for a regular mutual fund, and if you are well known about the stock market and its workings you can opt for a direct mutual fund.
What are the drawbacks of direct mutual funds?
The drawback of buying a direct mutual fund is that you have to do all the analysis related to investment by yourself.