For those aiming to spread out their investments with the goal of increasing their assets, mutual funds are ideal choices. They collect money from various investors and invest it in different stocks, bonds, and other secuities. In this article, we will focus on the major distinctions between direct and traditional mutual funds to help narrow down the choice that best suits your objectives.
What Are Direct and Regular Mutual Funds?
Mutual funds can be purchased using two methods, direct and regular. Both of these methods provide access to similar markets but differ in terms of the management and the associated fees.
Direct Mutual Funds:
This type of fund is bought directly from the Asset Management Company (AMC), like HDFC or Aditya Birla. Because there are no intermediary agents charging a fee, the expense ratio decreases. When a fund is directly purchased from an AMC, the purchases come directly from the fund. Consequently, no commission or distribution fees are withdrawn from the fund which results in substantial savings.
Regular Mutual Funds:
These types of funds are sourced through agents or brokers primarily affiliated with financial institutions. These agents or brokers receive a fee which adds to the expenses of mutual funds as compared to direct funds. For example, if you purchase HDFC mutual funds from HDFC Bank, you pay commission fees to the bank which reduces your return on investment.
Key Differences Between Direct And Regular Mutual Funds
Expense Ratio:
The expense ratio is one of the key ratios to evaluate before investing in mutual funds. Since there is no intermediary to assist in the investment, expense ratio on direct funds is usually lower than that on regular funds. Regular funds, in contrast, have higher expense ratios because they incur expenses related to paying commissions to brokers or agents.
Risk:
Direct investments can be riskier because decision making is solely in the hands of the investor. The absence of expert guidance increases the chances of getting poor returns because of high volatility or decisions driven by inadequate information. In contrast, regular funds are usually a less risky option since they are managed by professionals which considerably reduce the chances of poor investment decisions.
NAV (Net Asset Value):
A direct fund’s NAV is usually more than that of a regular fund’s because there are no commission expenses. The whole investment is used to purchase the asset. In case of regular funds, the commission paid to brokers or agents lowers the NAV and you receive less money invested into the fund.
Market Knowledge:
Direct mutual funds will be perfect for people who understand how the market operates and can make reasonable decisions. If one does not possess any market knowledge, a regular mutual fund will most likely suit them better because the intermediary will place you in the right direction while providing assistance.
Convenience:
Direct mutual funds are less conventional since the investor has to do all the paperwork and formal process involved. However, regular funds are easy to invest in because the intermediary does the paperwork and any other processes that go with it for you.
Returns:
In some instances, an investment into a direct fund would yield more returns in the long run compared to an indirect fund investment. This is largely due to the lower expense ratio associated with direct fund investments. For illustration purposes, A direct mutual fund investment of Rs. 10 lakh with a yield return of 20.34% will appreciate to a greater extent than investing in regular mutual funds that offer a return of 19.24%. In this case, the asset would grow to Rs. 12,03,400. The additional commission fees on the difference in return could account for lost value in the long term.
Example of Returns:
Investment Type Amount Invested Return (%) Asset Value After 1 Year
Direct Fund:
20.34% : 1. Direct -> Asset = Rs. 12,03,400, 2. Regular -> Asset = Rs. 11,92,400
Both cases are relative to the amount invested with a margin difference of Rs. 10 lakhs. Low expense ratios directly correlate with higher returns in direct investments.
As previously stated, Indirect Mutual Funds tend to have a lower return rate primarily because the expense ratio is higher than that of direct investments. Assuredly, there still is a difference in the margin of the funds returns.
Factors to Consider When Choosing a Mutual Fund
In choosing whether to invest into a direct or regular mutual fund, these are some points to consider.
Past Performance:
The rate of performance return in the past three to five years will give an indication of how effective the fund is and what its fluctuating returns are under different market settings.
Expense Ratio:
Look at the expense ratios for the various funds on offer to see how much of your money will be allocated to operational costs.
Diversification:
Make sure that the mutual fund has diversification into various stocks, industries and sectors such as banking, automobile and even NBFCs.
Fund Manager Track Record:
A good fund manager contributes a lot to positive return levels, and the very best ones having a wealth of experience tend to outperform their peers. Check out the fund manager’s history which is consistent with their credibility and reputation.
Conclusion
Choosing between direct and regular mutual funds depends on your investment objectives, familiarity with the market, and how much you are willing to pay for professional assistance that comes with regular funds. Direct funds, as a rule, tend to offer better returns as they have lower expense ratios. However, they require a greater deal of effort and expertise as the investor does. On the other hand, regular mutual funds are more expensive and do not provide many useful pointers, but are more comfortable and offer more help.
Investing in mutual funds is a great way to get returns from your investments in the long-run. With careful analysis of the options available, one can cherry-pick the fund type that suits their risk appetite, level of investment sophistication and long term goals.
