Investing in mutual funds has become a popular choice for many investors, thanks to the diversity and accessibility they offer. However, when it comes to selecting the right type of mutual fund, investors are often confronted with a choice: regular mutual funds or direct mutual funds?
While both options provide access to the same investment products, the route you take for investing can impact your returns in the long run.
Let’s break down the differences and understand which option might be best suited for your investment needs.
The primary distinction between regular mutual funds and direct mutual funds lies in the route of investment.
Regular mutual funds: These are typically bought through a mutual fund distributor or an advisor. The distributor charges a commission for recommending the fund to investors, which increases the expense ratio of the fund. As a result, investors pay higher fees, which can erode the returns over time.
Direct mutual funds: These are bought directly from the asset management company (AMC) through online platforms like Groww, Zerodha, or directly via the AMC's website. Since no intermediary is involved, direct funds come with a lower expense ratio, meaning more of your money stays invested and works for you.
If you have a basic understanding of mutual funds and investing principles, direct mutual funds can be a great choice. Here's why:
Lower expense ratio: Direct mutual funds tend to have a lower expense ratio, as they don’t involve any intermediary commissions. This can significantly improve your returns over time, especially if you are investing for the long term.
Better long-term returns: Because of the lower costs, direct mutual funds allow more of your capital to grow, which can lead to higher returns in the long run.
Control over your investments: When you invest in direct funds, you have more control over the investment process. You can directly compare different mutual fund schemes and select those that align with your goals, without relying on a distributor's suggestions.
Convenience for tech-savvy investors: Platforms like Groww, Zerodha, and others make it easy to invest in direct funds without the need to go to multiple asset management websites. This convenience appeals to investors who are comfortable using online tools and prefer managing their investments independently.
While direct mutual funds have clear benefits, there are still situations where regular mutual funds might be the better option, particularly for new investors or those looking for additional support:
For new investors: If you're just starting out and don't feel confident in making investment decisions on your own, regular mutual funds provide a layer of support. The distributor or advisor can help you understand your investment options, guide you through the process, and assist with portfolio construction.
Limited time for research: Investors who don’t have the time or inclination to research different mutual funds may benefit from the guidance of a financial advisor. Regular funds can take away the hassle of having to decide which fund is the best for your needs, as the distributor will help make those decisions for you.
Need guidance: If you prefer a more hands-on approach to managing your investments, and value the advice of an expert to navigate the complexities of the market, regular funds offer that added benefit of professional guidance.
For those with a basic understanding of mutual funds and investing, direct mutual funds offer numerous advantages. Investing via digital platforms like Groww or Zerodha offers a hassle-free experience, where you can compare multiple funds in one place, make quick investments, and even track your portfolio on the go.
Low costs: By cutting out the middleman, you avoid paying commission fees, which can be particularly beneficial if you plan to invest regularly or have a significant corpus.
Ease of access: If you're already familiar with online investing platforms, direct mutual funds are a natural choice. These platforms allow you to browse multiple funds across different AMCs, making the process smoother and faster.
Choosing between regular and direct mutual funds depends largely on your investment knowledge, preferences, and goals:
Choose regular mutual funds if:
(i) You are new to investing and prefer professional advice.
(ii) You do not have the time to research funds and would rather leave the decisions to experts.
(iii) You need someone to guide you through the process and assist with portfolio management.
Choose direct mutual funds if:
(i) You are familiar with mutual funds and understand how they work.
(ii) You want to avoid paying commission fees and prefer higher returns over the long term.
(iii) You like managing your investments yourself and are comfortable with online platforms.
Ultimately, the decision between regular and direct mutual funds boils down to your personal preferences, investment knowledge, and financial goals. While direct funds are ideal for investors who are comfortable with self-research and are looking for lower fees, regular funds offer additional support for those who need advice and guidance.
Assess your needs, understand the costs involved, and choose the option that best fits your investment style. Whether you opt for regular or direct mutual funds, the most important step is to start investing early and stay disciplined in your investment approach.
{Disclaimer: The information provided in this article is for educational purposes only and does not constitute financial advice. Investments in mutual funds are subject to market risks, and past performance is not necessarily indicative of future results. Before making any investment decisions, it is important to consult with a qualified financial advisor or conduct thorough research based on your individual financial situation and risk tolerance.}
