Mutual funds have become quite popular with Indian investors in recent years. Direct investing is not for everyone, so investors prefer this product that invests in stocks indirectly on their behalf. In other words, a mutual fund is a common investment tool that pools resources from investors who have similar financial objectives. Mutual funds are ideal for portfolio diversification and to build wealth over the long term. If you are considering investing in mutual funds, it would help if you can differentiate between regular vs. direct mutual funds.
Mutual funds are professionally managed and diversified across various asset classes to fetch attractive returns for investors. Broadly, mutual funds come in two types: regular and direct growth. As an investor, you should know the difference between direct and regular mutual funds. In this blog post, we will discuss regular vs. direct mutual fund and how each fares in comparison with the other. Let’s dig in.
What is Direct Mutual Fund?
The asset management company (AMC) or fund house directly provides these investment schemes to investors. In direct mutual funds, investors can buy these funds directly from the fund house without taking help from any intermediary like a distributor, financial advisor, or broker. These mutual funds have lower expense ratios compared to regular mutual funds as investors are not required to pay distribution fees or commissions to intermediaries.
Investors can visit the fund house or the fund’s official website to directly purchase these schemes. Direct mutual funds can also be accessed through SEBI’s RIA (Registered Investment Advisors) with a minimum charge for the advisory service.
What is a Regular Mutual Fund?
One should understand the difference between direct and regular mutual funds. Unlike direct mutual funds, regular mutual funds can be accessed or purchased only with the help of intermediaries like distributors, brokers, and financial advisors. Here, investors are required to pay commissions or brokerage fees as these intermediaries offer help with transactions, investment information, and portfolio analysis. Because of this, regular mutual funds have a higher expense ratio.
Difference between Direct and Regular mutual funds
To understand which mutual fund is a better investment option among direct and regular growth mutual funds, you must learn about the difference between direct and regular mutual funds first. There are certain aspects such as a low expense ratio, higher returns, and more. Below, we will discuss these points of difference in detail.
Low expense ratio
The expense ratio refers to the fees charged by mutual fund companies. The direct growth mutual fund has a lower expense ratio when compared to the regular growth mutual funds. Suppose a scheme or fund charges a 0.2% expense ratio, which means 0.2% of the AUM is used to cover the overall operating and administrative expenses of the fund.
In regular growth mutual funds, you need to seek help from advisors. When advisors help with your investment, you need to pay a fee or commission which increases the expense ratio. But in direct growth mutual fund investment, you do not need help from advisors, so it offers a much lower expense ratio than regular mutual funds.
Higher returns
Another vital aspect where direct and regular growth fund differs is in returns. Direct growth mutual funds offer relatively higher returns than regular growth mutual funds. The primary reason behind direct growth vs. regular growth returns is the expense ratio. As the expense ratio of a direct growth mutual fund is lower than the regular growth scheme, it also leads to increased returns as you do not need to pay for operating and administrative costs as with regular growth schemes.
Higher NAV
NAVs or net asset value, is another crucial aspect where direct and regular mutual funds differ. Direct mutual funds generally offer higher NAVs compared to their regular growth counterparts.
The net asset value or NAV refers to 1 unit of mutual fund. The net asset value of a mutual fund is derived by dividing the total assets owned by the fund by the number of outstanding units. The fund-owned asset generally varies based on the debt and equity instruments. Sometimes cash flow also counts as a part of fund-owned assets. So, if the fee paid to the advisor can be avoided, the NAV of the fund will be higher. Therefore, direct growth mutual fund offers higher NAVs in comparison to regular growth investment funds.
Fewer chances of being misled
Many investors rely on financial advisors to make trouble-free investments. But in reality, this is only partially true as investors often complain that advisors mislead them. However, investors would do well to remember that not all financial advisors mislead investors.
On the other hand, direct growth mutual funds don’t require the involvement of financial advisors.
You’re in control
Lastly, direct growth mutual funds offer full control when investing in mutual funds. While investing in regular growth mutual fund investments requires an intermediary, investors themselves can open and operate direct mutual fund accounts. However, a direct mutual fund may seem tricky as you are in control of the investment. You need to understand how mutual funds work, the details of AMC’s processes, and the KYC update process. However, having full control also gives you the freedom to understand and manage your fund investment as you wish.
Direct or Regular mutual fund: Which one should you choose?
Mutual funds are one of the safest and most popular options for investment when compared to other derivatives. However, choosing between direct growth vs. regular growth can be challenging for many. To understand which one will work best for you, first, you need to understand the difference between direct and regular plans, such as the expense ratio, NAV, and returns as this will determine your returns and the direction of your investment journey.
Regular plans may be ideal for newbie investors as they need expert support for their investment. But if you are a well-versed investor, direct plans may suit you more as they offer full control, a low expense ratio, and higher returns.
Conclusion
The first and foremost important thing you should remember when discussing the difference between direct and regular mutual fund is that both are designed to serve different purposes and has their unique pros and cons. Although, when it comes to selecting a type of investment this can vary from one investor to another based on their goals and preferences. However, lower expense ratio, higher NAVs, and returns make direct plans more preferable for experienced investors. At the same time, regular plans with support from expert advisors are beneficial for investors who are new to mutual fund investing.
