Mutual funds have now become the first choice for investment. It is one of the safest and most convenient forms of investment, as you can invest in form of SIP (Systematic Investment Plan) many investors are in dilemma should we consider regular or direct mutual funds?
In this article, we have listed all the reasons that will help you know why Direct Mutual Funds should be the option for you.
Before we compare them let us understand the concepts.
What are Direct Mutual Funds?
As the name implies Direct Mutual Funds are the ones that are directly offered by the AMC or Fund house. This means that there are no third-party agents involved. Therefore there is no commission or brokerage too.
Hence in a Direct Mutual Fund, the expense ratio is lower. Thus the investor will get a high return because of the low expense ratio. You can easily identify a Direct Mutual Fund as the word Direct is prefixed in the name. Direct Mutual Funds can be bought either online or offline.
What are Regular Mutual Funds?
Regular Mutual funds are the ones that are brought by investors via an intermediary. Intermediaries can be either brokers, distributors, or advisors. A certain fee is charged by the intermediaries to the fund house for selling their mutual funds. The AMCs generally cover the fees via expense ratio.
The expense ratio is higher when compared to a direct mutual fund. Investors who are new to the market can also seek expert advice from intermediaries.
What is the difference between the Regular Mutual Fund & Direct Mutual Fund?
Below is the table that indicates the major difference between the two
| Parameters | Direct Plan | Regular Plan |
| Returns | High ( No additional fees) | High Expense ratio |
| NAV | High | Low |
| Expense Ratio | Low Expense Ratio | High Expense Ratio |
What are the Advantages of a Direct Mutual Fund?
Low Expense Ratio: The expense ratio in a direct mutual fund is much lower as compared to a regular mutual fund. Many investors seek advice from mutual fund advisors or local financial advisors when investing via a regular fund. They don’t realize the fact that the fee is paid from their pockets!
It is deducted from your investment amount and paid to the agent or advisor. Therefore a higher commission means a high expense ratio for mutual funds. Since in direct plans there are no commission fees or distribution charges involved the expense ratio is much lower as compared to a regular mutual fund.
Higher Returns:
The return of a direct mutual fund is always higher as compared to a regular version of the same mutual fund. The only reason for it is the ‘Expense Ratio’
Higher NAV (Net Asset Value):
The NAV of any direct mutual fund is always higher when compared to a regular version of the mutual fund. It indicates the value of a single unit of mutual fund and is determined by adding the total assets owned by the fund and then dividing it by the number of units outstanding. The different types of funds include debt instruments like bonds and debentures and equity instruments like company shares.
In some cases, cash will also be added as a part of all the assets owned. The total of these assets is calculated to arrive at the value of these assets owned by the fund. If the fees that are paid to the agents can be avoided then the amount of the NAV will be higher.
Also Read: Should You Invest in a Fund of Funds?
Few chances of Misguidance:
Most investors feel that having an advisor will be helpful but they are partially correct. If you look at the data many consumer complaints are filed against wealth advisory agents who duped its investors and stole millions of money.
Since their compensation is dependent on your investment it brings out a conflict of interest. In direct mutual funds, the chances of such activity are very low.
Control:
As said ‘If you lose control, everything will fall’ with direct funds you are in full control of your investment. Being in control also means that you will have to do all the homework yourself about mutual funds.
A little effort from your end can take you a long way. This will also assist in taking an active approach to your long-term financial goals. You can also compare different funds and make sound decisions about your investment.
Investors who are looking to reduce their expense ratio and increase their returns should definitely invest in Direct Mutual funds. All you need is knowledge and understanding of the application process & other legal formalities.
Paying an advisor or agent is not worth it as it doesn’t even add any additional value. Last but not least ‘Investment in Mutual funds is risky, it is advised to read all the documents very carefully. Don’t forget to take a step today for a better tomorrow.
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