Choosing between Direct and Regular Mutual Funds for investment – Which one is more beneficial
When selecting mutual funds for investment, the common goal is to achieve the best returns possible. This often leads investors to search for the so-called “best” mutual funds. However, determining what constitutes the “best” fund is subjective and varies depending on individual preferences and financial goals.
According to reports, the percentage of direct plans in SIP (systematic investment plan) accounts has increased to nearly 40% from approximately 21% four years ago. This indicates that a majority of new investors are opting for direct investment channels.
Mutual fund investors have the choice between direct and regular plans. Regular plans, distributed by intermediaries such as banks and agents, involve commissions for their services.
On the other hand, direct plans are commission-free and are designed for investors who are comfortable managing the process on their own.
These plans can be accessed through mutual fund company websites and online platforms like Groww and Zerodha, which have played a significant role in their growth. As of the end of October 2024, direct plans accounted for 39% of the 101 million SIP accounts, compared to 21.5% in October 2020 and 17% in March 2020.
Direct vs Regular Mutual Funds
Investors seeking to maximise their returns often face the decision of opting for either Direct or Regular Mutual Funds. Direct Mutual Funds allow investors to purchase schemes directly from Asset Management Companies (AMCs) without involving intermediaries. This typically results in a lower expense ratio as there are no commission fees payable to distributors, thereby enhancing the potential returns on investment.
Conversely, Regular Mutual Funds are routed through mutual fund distributors who offer their expertise and handle various formalities like KYC documentation. For these services, distributors charge a fee, which increases the overall expense ratio of the investment.
Investing in Direct Mutual Funds
The key distinction between these two types of mutual funds lies in the presence of intermediaries and the associated costs. Direct Mutual Funds, being free of middlemen, are accessible online through AMC portals, allowing investors to manage their investments independently. However, Regular Mutual Funds provide the advantage of professional advice and management, which can be particularly beneficial for novice investors. Despite the higher expense ratio in Regular Mutual Funds due to distributor commissions, they offer added value through expert guidance, which can lead to better investment decisions over time.
“When choosing between regular and direct mutual funds, many investors assume that direct funds are the better option as they are offered at a lower expense ratio. However, this isn’t always the right approach for everyone. While direct funds can be beneficial for those who are expertise in fund selection and managing their portfolios effectively, they may not be the best choice for beginners or those who lack the time to monitor their investments actively,” said Shweta Rajani, Head – Mutual Funds, Anand Rathi Wealth Limited.
She added: “A first-time investor invests in mutual funds and invests in funds solely based on their recent performance, assuming that past returns will continue. However, this strategy doesn’t always work, as market cycles constantly change and direct investors have a tendency to invest in sectorial/thematic funds based on their performance in recent times, but these funds will undergo cyclical performance and required tactic entry & exit and most of the direct investors have tendency to invest in NFO’s by looking over their lower NAV, but these can be lead to costly mistakes in the investing journey.”
Mixed advantage
When assessing returns, Direct Mutual Funds have the edge due to their lower expense ratios. Over a prolonged period, the differences in expense ratios, which range from 0.5 to 1%, can significantly impact the Net Asset Value (NAV) and the final returns. Regular Mutual Funds, while incurring higher costs, could potentially deliver better results through strategic management by experts. New investors may find the personalised services and convenience offered by Regular Mutual Funds valuable, as market experts continuously monitor portfolios to optimise returns.
“Investing through a financial advisor can provide a more structured approach. Advisors help in selecting the right mix of funds, ensuring diversification, and rebalancing the portfolio when needed which helps investors to navigate market cycles smoothly. During market downturns most of the direct fund investors have a tendency to do panic selling as they don’t have expertise to guide, so having financial advisor can helps to safe guard our investments from mistakes and reach our goals smoothly. Instead of focusing only on expense ratios, investors should also consider the value of professional guidance and advisory alpha getting from advisors,” Rajani noted.
Experienced vs novice
The market landscape for mutual funds is diverse, with varying investment preferences among investors. Experienced investors who possess substantial market knowledge often choose Direct Mutual Funds for their cost-effectiveness and higher return potential. On the other hand, Regular Mutual Funds cater to those who prefer additional support and a structured investment approach. The choice between Direct and Regular Mutual Funds largely depends on individual investor needs, risk tolerance, and financial goals.
Direct Mutual Funds offer a straightforward, cost-efficient approach, appealing primarily to seasoned investors. Regular Mutual Funds, with their added layer of professional supervision, provide a safer avenue for new investors. Each investor must evaluate their financial goals, market understanding, and comfort with managing investments independently to make an informed choice. Thus, the decision ultimately hinges on the suitability of the mutual fund type to the investor’s specific circumstances.