Many investors seek high-return investment opportunities, even with a degree of risk. Mutual funds are popular, offering two main types: regular and direct. However, experienced investors recommend against investing in regular mutual funds.
Why not invest in regular mutual funds, and what are the alternatives? Let’s explore. Regular mutual funds are bought through an intermediary such as a financial advisor or a bank relationship manager.
These plans are sold by intermediaries and are indicated in the mutual fund name as “Regular” or “Reg.” In contrast, direct mutual funds are marked as “Direct” or “Dir.”
Intermediaries manage regular funds and play a crucial role in assessing the risk and return of investments.
Their oversight ensures the funds are placed in the right investments, they monitor the portfolio, reducing the need for frequent fund switching, and keep an eye on profits, which can be beneficial in the face of market fluctuations. This information should make investors feel informed and aware of the process.
However, regular funds typically yield lower profits than direct mutual funds due to the high charges imposed by intermediaries.
These charges, such as an agent’s commission deducted from the income, can significantly reduce returns. For instance, if the agent’s cost ratio is 2%, they will deduct 2% of the total returns, meaning that if you receive Rs 1 crore, they will take Rs 2 lakh as commission and give you Rs 98 lakh.
On the other hand, direct funds generally have an expense ratio, which is the percentage of the fund’s average net assets that are used to pay for operating expenses, of around 2% lower than regular funds.
Given these considerations, senior investors strongly advocate for direct funds. Even for those with some knowledge about mutual funds, experts recommend choosing direct funds for their potential to deliver superior returns. This reiteration should make investors feel reassured and confident in their investment decisions.