Direct vs Regular Mutual Fund - Which is Better?
Mutual funds are a popular investment option preferred by beginners and seasoned investors alike. However, for beginners, investing in mutual funds can seem like a complex process. Learning about market conditions and mutual fund plans may overwhelm some. To understand which mutual fund plan to invest in, as an investor you need to assess your financial goals, investment style, and risk appetite. This will help you choose a plan that aligns with your financial goals.
Mutual fund schemes have two plans: Direct and Regular. Having a clear understanding of your financial goals will help you with a choice that best suits you as an investor. This article explores direct mutual funds, regular mutual funds and their benefits & limitations.
What are Direct Mutual Funds?
Direct mutual funds allow the investor to purchase mutual funds from the Asset Management Company (AMC). This removes the need to pay commission to the distributor. The investor saves on commission and fees associated with the traditional mutual fund investing.
For instance, if someone wants to book a hotel room, they might choose to use an online travel agency. In this case, the agency acts as an intermediary between the traveler and the hotel. However, if the traveler decides to book directly with the hotel, they can bypass the agency and potentially avoid the service fees charged by the agency, resulting in a better deal.
What are Regular Mutual Funds?
Regular mutual funds are mutual funds bought by third party agents like brokers or distributors. The third-party agents charge a fee to the AMC when they sell their mutual funds to any investor. The AMCs will usually recover this fee through expense ratio. This is why the expense ratio is a bit higher and the returns comparatively lower than direct mutual funds. Regular mutual funds are best suited for investors new to mutual funds who lack sufficient knowledge about the market. The AMCs monitor their portfolio and provide them with information on the market conditions, fund performance and assist in any of the investor inquiries at a nominal fee.
Also Read: A Beginner’s Guide to Investing in India
Difference Between Direct and Regular Mutual Funds
Criteria | Direct Mutual Funds | Regular Mutual Funds |
NAV (Net Asset Value) | Higher NAV due to lower Total Expense Ratio (TER) | Lower NAV because of higher TER |
Financial Advisor’s Role | No need for financial advisors | Financial advisors assist with transactions and fund decisions |
Return on Investment | Potentially higher returns (1% greater CAGR) due to lower TER | Lower returns due to higher TER affecting performance |
Fund Management | Investors must research and monitor fund performance | AMC fund managers Managed by experienced fund managers for optimal results |
What are the Advantages of Regular Plan over Direct plan in Mutual Funds?
Investing in mutual funds is a complex process that involves market knowledge, risk assessment and fund selection. Regular plan has many advantages over Direct plan as listed below:
Features | Regular Plan | Direct Plan |
Expert Advisor | Investor gets support in terms of market conditions and personalized advice based on the investor’s goal. | No access to any advisor. Investors need to do their own research about the market and choose mutual funds independently. |
Convenience | It gives the investor the convenience of investing, where the fund manager handles their portfolio. | Investors must handle the portfolio on their own and keep track of market conditions. |
Portfolio Management | The fund manager helps to diversify investor portfolio and manage the portfolio regularly | Investors manage their own portfolio. |
Risk Appetite | Fund managers assess the risk appetite of an investor based on age, income and life phase. | Investors must assess and figure out their risk appetite. |
Time | Investors save a lot of time, since the fund manager handles fund selection and monitoring. | Investors need to give a significant portion of their time to stay updated on market trends and monitor their portfolio. |
Value Added Service | Regular mutual funds offer other value-added services like investment records, documents for tax filing, investment insights and goal-based investment advice. | The investor must do these on their own, which takes up significant time. |
Which is Better: Direct or Regular Mutual Fund?
Before choosing a mutual fund plan, one needs to understand their investment style and have clear financial goals. Once that is clear, the investor can choose the plan that best aligns with their financial goals.
- If the investor has a thorough understanding of market conditions and regularly keeps track of them, they can likely opt for direct mutual funds. If one invests in direct mutual funds, they deal directly with the fund house. They can potentially earn higher returns than regular mutual fund, since the expense ratio is low. They also save on commission fees or brokerage that are paid to intermediaries.
- If the individual is new to investing or requires professional support, they can opt for regular mutual funds. Regular mutual funds involve intermediaries like a broker. They assist the investor with paperwork, customer support and guide them on their investment. However, due to the brokerage, the expense ratio is higher and if not checked can impact on one’s returns as well.
If you are a seasoned investor, investing in direct mutual funds could be the best option for you. Alternatively, if you are a beginner in investing, and not keeping a regular track of the market, a regular mutual fund is most suitable for you.
Also Read: What Is SIP Investment – Meaning and How It Works
Conclusion
As an investor, whether you are a beginner or a seasoned one, you need to determine which plan best suits you. To decide which mutual fund works for you, factor in your current age, life phase, financial goals and risk appetite. Regular mutual funds are best suited for investors who lack the time to track changing market conditions and need guidance on their mutual funds. Direct mutual funds are more suited for an investor who is tuned in to market conditions and wants to earn relatively more returns as compared to returns on regular funds.
Frequently Asked Questions
Which Is Better, Direct Or Regular Mutual Fund?
It depends on the investor. If you have more knowledge and prefer flexibility, go for direct mutual funds to save on brokerage. If you are new and prefer professional management, opt for regular mutual funds.
What Are The Disadvantages Of Direct MF?
The disadvantage of direct mutual fund is the high risk. In case of losses, they are the sole responsibility of the investor.
Is It Good To Switch From Regular To Direct Plan?
If you are a seasoned investor having sound knowledge on mutual funds, opting for a direct plan is a good option.
Which App Is Best For Direct Mutual Fund Investment?
Apps that are popular for direct mutual fund investment are Groww, Coin, ETMoney, Paytm money among others.
Which Mutual Fund Type (Direct Or Regular) Is Better For Long-Term Investors?
It depends on the investor. For long-term investing, if the investor has more knowledge and prefers flexibility, they can opt for direct mutual funds to save on brokerage. However, if the investor has limited knowledge and wants professional help, they may opt for regular mutual funds.
Do I Need A Financial Advisor To Invest In Direct Mutual Funds?
No, you do not need a financial advisor to invest in direct mutual funds.
How Does Choosing A Direct Plan Impact My Investment Returns?
Choosing a direct plan often gives higher returns, as brokerage fees are eliminated.
Can Beginners Invest In Direct Mutual Funds, Or Should They Start With Regular Plans?
For beginners, who have limited knowledge about mutual funds, it is advisable to start with regular plans.
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