Many investors seek high-return investment opportunities, even with a degree of risk. Mutual funds are popular, and there are two main types: regular and direct.
However, experienced investors recommend against investing in regular mutual funds. Why not, 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.
Direct vs. Regular Mutual Funds
Net Asset Value (NAV): Fund houses have various expenses for managing mutual funds, including paying commissions and brokerage to intermediaries.
These expenses are deducted from the mutual fund NAV. In other words, fund houses collect commissions and brokerage from investors, which are then paid to brokers. Direct mutual funds do not have these additional costs, resulting in a slightly higher Net Asset Value (NAV) than regular schemes.
Income-Expense Ratio: Direct plans have a lower expense ratio, potentially leading to higher returns in the long run. On the other hand, regular funds have higher commissions and brokerages, leading to lower returns.
Role of Financial Advisor: In direct mutual funds, investors can directly choose which asset classes to invest in and do not require a financial advisor. In contrast, in regular mutual funds, a financial advisor provides suggestions regarding investments based on the investor’s financial goals and guides them on how and how much to invest.
Which One to Choose? Regular mutual funds are suitable for individuals who lack knowledge about stock market performance and investments, as they receive support and guidance from financial experts. However, these services come with a commission or brokerage fee.
On the other hand, individuals who are knowledgeable about the stock market, portfolio diversification, and financial skills can opt for Direct Mutual Funds. This choice reduces unnecessary fees such as brokerage and commissions, potentially leading to higher returns in the long run.
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.
Please note that the points mentioned in this article are for informational purposes only. Stock market investments involve inherent risks, and it is advisable to seek the advice of a personal financial expert before making such investments.