Direct Vs Regular Mutual Funds: How They Are Different From Each other
Mutual fund investing options
While investing in a mutual fund scheme, you can either take the direct route or the regular route. Deciding which route will depend on your knowledge of mutual fund schemes, the time you have to select schemes for investment and review them from time to time. This article will discuss Direct Vs Regular Mutual Funds: How they are different from each other.
Before we look at the direct vs regular mutual funds differences, let us understand each of these.
Regular mutual fund schemes
You can buy a regular mutual fund scheme through an intermediary such as a mutual fund distributor (MFD), broker, bank, etc. The intermediary analyses the client’s requirement and accordingly recommends the appropriate mutual funds for investment. The fund house pays the intermediaries a commission for the schemes they recommend to their clients.
Direct mutual fund schemes
You can buy a direct mutual fund scheme directly from the mutual fund house (either online or branch) or online intermediaries like Glide Invest. In the case of direct mutual funds, either there is no intermediary involved, or even if an intermediary like Glide Invest is involved, there is no commission paid.
The market regulator, SEBI, has mandated all fund houses to offer a direct plan and regular plan for each mutual fund scheme. Both the regular and direct plans are managed by the same fund manager. Everything, including the fund portfolio, is the same, except for the expense ratio.
Direct vs regular mutual fund
Now that we understand the concept of regular and direct mutual funds, let us understand direct vs regular mutual fund differences.
|Feature||Regular mutual fund||Direct mutual fund|
|Role of intermediary||A regular mutual fund is bought through an intermediary such as a mutual fund distributor, broker, bank, etc.||A direct mutual fund is bought from the fund house (online or branch) directly or through intermediaries such as Glide Invest.|
|Payment of commission||As the services of an intermediary are involved, there is a commission paid to compensate them.||If the scheme is bought directly from the fund house, there is no intermediary involved, and hence there is no commission paid. Even if an intermediary such as Glide Invest is involved, still no commission is paid|
|Expense ratio||The expense ratio of a regular fund is higher than that of a direct fund. The expense ratio can be higher by 0.50 to 1%.||The expense ratio of a direct fund is lower than that of a regular fund.|
|Net asset value (NAV)||The net asset value of a regular fund is always lower than that of a direct fund due to a higher expense ratio.||The net asset value (NAV) of a direct fund is always higher than that of a regular fund due to the lower expense ratio.|
|Returns||The returns of a regular fund are always lower than that of a direct fund.||The returns of a direct fund are always higher than that of a regular fund.|
How do you choose between regular and direct funds?
Choosing one between direct vs regular mutual fund completely depends on your knowledge of mutual funds and how comfortable you are with doing things yourself.
Who should choose regular mutual funds?
Some people are first-time investors. They don’t have much knowledge of mutual funds. Some people have been investing in mutual funds but don’t have the time to research and review them due to their busy work schedules. Such investors should avail themselves of the services of financial advisors and go with regular mutual funds.
A financial advisor can help you identify your financial goals, do risk profiling, appropriate asset allocation, recommend mutual fund schemes, review them regularly, and provide handholding till your financial goals are achieved. When a financial advisor adds so much value for things that you don’t have knowledge of, it is okay to pay a slightly higher expense ratio and go with direct mutual funds.
The other approach is to avail of the services of a fee-based financial advisor and invest in direct mutual funds. A fee-based financial advisor can provide you with need-based financial advice and recommend direct mutual funds.
Who should choose direct mutual funds?
Some investors prefer to research everything on their own before taking an investment call. These are self-learners. Such investors can choose to go with direct mutual funds. As these investors have a decent knowledge of mutual funds, they can review their mutual fund investments from time to time till they achieve their financial goals. Going with direct mutual funds helps you reduce your expense ratio and thus improve your returns.
Between direct vs regular mutual funds, whichever fund you choose, you should make a very sound decision after a complete assessment of all the governing factors.