Difference Between Direct and Regular Mutual Funds Explained
Instances are not rare, whereby the first-time investors struggle to select between direct and regular funds for investment. It is one of the first decisions you need to make before investing. However, you need to understand the difference between direct and regular mutual funds to select a suitable plan for your investment portfolio.
Are you confused between direct and regular funds in your investment process? Read on!
What Are Direct Mutual Funds?
A direct mutual fund refers to a mutual fund that is offered directly by Asset Management Companies or fund houses. It does not require any third parties or intermediaries in this process, such as brokers or distributors of a fund. This means that no commission or brokerage fees are associated with such funds.
Hence, the expense ratio of a mutual fund direct plan is relatively lower. Returns will be automatically higher in such funds because of the lower expense ratio.
What Are Regular Mutual Funds?
Regular mutual funds involve intermediaries in the process. Investors take the help of brokers, distributors or advisors while investing in such funds. They are unsure of their capabilities and try to take expert help in their investment procedure. The fund houses need to pay certain charges to these intermediaries for selling their funds, which they recover from the investors in an expense ratio.
The expense ratio is higher for the investors, thereby generating comparatively lower returns than direct funds. This can be a significant difference between direct and regular mutual funds. Therefore, regular funds are more convenient for new investors as it allows expert opinions.
What Are the Differences Between Direct and Regular Mutual Funds?
In 2012, SEBI introduced direct plans, enabling experienced investors to purchase funds directly without involving intermediaries. The fund manager manages direct and regular mutual funds, investing in similar assets. However, from the following table, one can observe the significant difference between direct and regular mutual funds.
Investors can avail such funds directly from the fund houses and AMCs without involving third parties or intermediaries.
Investors need to involve third parties and use their expert opinions and advice before investing in any fund.
TER (Total Expense Ratio) is comparatively lower. It is mainly because the charges of intermediaries hardly apply in such funds.
TER is higher since the charges of brokers, advisors, and other intermediaries will apply to investors.
The returns are usually higher. The TER is lower without involving third-party charges. The difference between the returns in direct and regular plans can be 0.5%-1%.
Similarly, the returns will be lower since the charges of intermediaries are applicable in the TER. The direct plan generates 1% CAGR if the TER of a regular plan is 0.75% more than a direct plan.
The TER of any mutual fund is decided from its Net Asset Value (NAV). Since its TER is lower, direct funds have comparatively higher NAV.
The NAV of a regular plan is relatively lower than that of a direct fund. The TER is higher in such funds.
The entire market research is to be conducted by the investors. They do not receive any help from anyone in this regard.
In such plans, an investor can receive help from third party advisors and brokers. Based on the information they put forward, an investor makes decisions.
Investors do not receive any advice or support regarding the financial requirements. They need to do everything by themselves.
Investors can take advice from brokers and advisors. They can enhance their financial decisions with their expert opinions.
Which Is Better Between Direct and Regular Mutual Funds?
As you can see, identifying the differences between regular and direct mutual funds is vital before making investment decisions. However, an investor might wonder about the right plan to opt for. Consider the below-mentioned points before deciding.
- Professional Advice: New investors often struggle to make financial decisions because of a lack of market knowledge. In this regard, regular plans can be helpful. These enable investors to receive advice and opinions from market experts, and they can make their decisions based on these. This way, they can avoid making mistakes by taking professional advice. Such ideas can also help them earn higher returns.
- Convenience: This factor comes hand-in-hand with professional advice. When comparing direct growth VS regular growth, the latter is more convenient. It enables investors to remain on the back foot, with the intermediaries responsible for making significant decisions. Therefore, the investment process becomes more suitable for investors in regular plans.
- Expense Ratio: A significant aspect of mutual fund investment rests with its expense ratio. In this context, the direct plans are more favourable as per the list of differences between direct and regular mutual funds. These plans do not require involving the intermediaries. As a result, the charges of such intermediaries are not included in the expense ratio.
- Investment Returns: This factor is again directly connected to the expense ratio. Direct plans offer higher returns, making it preferable for experienced investors. Investors complete the investment procedure without intermediaries, avoiding their charges. As a result, returns are comparatively higher in direct plans.
- Value-added Services: Intermediaries often provide several value-added services in regular funds. They maintain investment records, offer tax proofs to tax filing, work on redemption facilitations, etc. These are often useful for inexperienced investors, who hardly have much financial knowledge. On the other hand, such services are not present in direct plans.
Now that you know the differences between direct and regular mutual funds, choose the one you are comfortable with. While direct plans can be convenient for experienced investors, regular plans support new and inexperienced ones.