Direct Vs Regular Mutual Funds: Mutual funds have become the most popular method of investment today. Be it a new investor or an experienced one, a question comes in everyone’s mind whether to take direct fund or regular fund? Both are the same scheme, but the difference between them can have a big impact on your returns in the long run. Let us understand in simple language what both are, how they work and which option is better for whom.
What is the difference between direct and regular funds?
First of all, understand that the investment scheme and fund manager in both are exactly the same. The only difference is that the path of investment is different.
Direct Mutual Fund
You buy direct funds directly from an online platform like Groww, Zerodha, Paytm Money or from the website of the Asset Management Company (AMC). There is no agent or distributor in these, hence the company gives you funds at low expense ratio. The result is higher returns.
Regular Mutual Fund
Regular funds are purchased through a distributor, agent or bank. The distributor selects the right fund for you and charges commission for this service, which is included in the expense ratio. The effect of this is that you get slightly less returns.
Expense ratio: biggest impact on returns
The expenses of any mutual fund decide which of the two will give more benefits.
- Direct Funds: Less Expenses
- Regular funds: Higher expenses (as commission is involved)
If the returns of a fund are 12 per cent and there is a difference of 1 per cent in the expense ratio, then this small difference creates a big difference in returns in the long run. For example, if you have invested Rs 10 lakh for 15 years – let’s say direct fund will give 12 percent return while the same regular fund will give 11 percent return, then after 15 years the value of direct fund will be around Rs 54 lakh and the regular fund value will be around Rs 46 lakh i.e. a difference of Rs 8 lakh.
Who should choose regular fund?
Not every investor is comfortable doing research himself. Regular funds may be better for such investors-
- New investors- If you do not understand mutual funds and have limited knowledge about the risks, then it is better to take help from an expert.
- Investors short of time- Those who are already investing in multiple asset classes or are unable to devote time to research can choose regular funds.
- Investors dependent on intermediaries- Some people do not want to take their own financial decisions. They prefer to invest through a trusted distributor or bank relationship manager.
Who should choose direct fund?
Choosing a direct fund is right if you want more control over your investments and want to get better returns in the long run.
- Want to save commission- If your goal is to save 0.5%–1% additional expenses every year, then direct funds are suitable.
- Have basic knowledge of mutual funds- If you understand returns, risk, NAV, SIP etc., then you can easily invest in direct funds.
- Use online platform- Buying direct funds on apps like Groww, Zerodha, ET Money is very easy and transparent.
Which option gives more benefits?
Direct funds give more benefits in the long run, because expenses are less and returns are higher. But it is equally true that if you do not have investment knowledge, then regular funds are a safe option for you, because you can take better decisions with the advice of experts.
Both direct and regular mutual funds are good. It just depends on your investment experience, time and convenience which option is right for you. If you can learn and are willing to do your own research, direct funds can grow your wealth quickly. But if you want to be safe by taking professional advice, then regular funds are better.
