When you decide to invest your hard-earned money in mutual funds, you will have to choose between direct and regular mutual fund schemes.
Each option has its own advantages and disadvantages, so it’s important to understand the differences before deciding. This will help you make an informed choice that aligns with your financial goals and risk tolerance.
What are direct mutual funds?
Direct mutual funds are investment schemes in which investors buy fund units directly from the asset management company (AMC) without involving any intermediary, such as a broker or distributor. This means you deal with the fund house directly, eliminating any commissions or distribution charges associated with regular mutual funds.
Since no intermediaries are involved, direct mutual funds generally have a lower expense ratio, which can result in higher returns than regular mutual funds.
What are regular mutual funds?
Regular mutual funds are traditional investment schemes where investors purchase fund units through a distributor or broker. These intermediaries provide personalised investment advice, paperwork assistance, and ongoing portfolio management support.
However, their services come at a cost through commissions and distribution expenses. As a result, the expense ratio of regular mutual funds is typically higher than direct mutual funds.
Differences between direct and regular mutual fund
|Aspect||Direct Mutual Fund||Regular Mutual Fund|
|Cost||Lower expense ratio||Higher expense ratio|
|Returns||Potentially higher returns||Relatively lower returns|
|Convenience||DIY approach||Assisted by intermediaries for transactions|
Expense ratio: The expense ratio is the annual fee the mutual fund house charges to manage your investment. In direct mutual funds, the expense ratio is comparatively lower as no intermediary commissions are involved. This leads to a significant cost advantage, boosting your returns over time. On the other hand, regular mutual funds have higher expense ratios due to the commissions paid to the intermediaries, which can eat into your overall profits.
Returns: Direct mutual funds have a cost advantage, resulting in potentially higher returns than regular mutual funds. Over the long term, even a small difference in expense ratios can substantially impact your investment portfolio.
Convenience: Investing in regular mutual funds may be more convenient for some investors, especially those who prefer guidance from financial advisors or need more familiarity with online investment platforms. In contrast, direct mutual funds require investors to take charge of their investment decisions, which may appeal to those who are financially savvy and prefer complete control over their investments.
To wrap up
Direct and regular mutual funds offer distinct advantages tailored to individual preferences and financial goals. Whether you opt for cost-efficiency and control or expert counsel, both paths hold the promise of achieving long-term financial success.