Introduction

Mutual funds are a valuable tool to grow your capital wisely. But which mutual fund scheme is the best suited for you to invest effectively? Even though many similar traits make it hard to pick one, there are few prominent differences between the schemes. Unearth the facts about direct and regular mutual funds and make a well-informed decision.

Mutual funds are slowly becoming a go-to investment option for salaried employees and self-employed individuals these days. Mutual funds can help you earn much more money than other traditional favourites such as fixed deposits. Mutual fund performance has been remarkable in recent years because of the availability of tax savings. Plus, mutual funds are now giving more returns with liquidity. So, if you are one of those who have made up their mind to invest in a mutual fund, you have two ways to invest. But before we jump into that topic, let’s know more about mutual funds and how beneficial they can be for you.

The ABCs of Mutual Funds

A mutual fund is a pool of funds where investors invest their savings as per a specific objective. Once the incurred expenses are deducted, the total income earned through the investments is distributed equally among all investors. These funds are managed by professional managers. Mutual funds come with lock-in periods which depend on the type of fund chosen by the investor. Since mutual funds are more prone to market risks, investors don’t get a fixed rate of interest. However, the rate of interest provided by mutual funds is comparatively higher than most other investment instruments.

As previously mentioned, after selecting the mutual fund scheme, there are two options available to investors of all kinds and categories of mutual fund schemes – Regular mutual fund and direct mutual fund. Ever wondered what are the differences between regular and direct mutual funds and how you can pick a suitable scheme for yourself? Read on to know more.

Direct Mutual Funds

The AMC (Asset Management Company) or fund house directly offers this type of mutual fund, meaning that there is no involvement of third-party agents like brokers or distributors. This mutual fund requires no commissions and brokerage since no third-party agents are involved, making the expense ratio comparatively lower. And, the return from investment is higher because of the lower expense ratio. This type of funds can be bought via online or offline mode.

Regular Mutual Funds

Regular mutual funds are those that are bought through third-party agents like brokers, distributors, or advisors. The third-party agents charge a certain fee to the fund house for selling their mutual funds. The AMCs generally recover this fee through expense ratio, which results in an expense ratio slightly higher and returns lower than direct mutual funds. This plan is best-suited for investors new to mutual funds and who do not have enough knowledge about the market and time to monitor their portfolio because they can get expert advice at a nominal fee.

Difference Between Direct Mutual Fund and Regular Mutual Fund

Direct mutual fund was introduced by SEBI in 2012 to enable investors to buy mutual funds without any intermediaries in between. The same mutual fund manager manages both direct and regular mutual funds, and investors also invest in the same assets. However, the difference lies in the amount to be paid.

Investors with regular mutual funds are required to pay commission, whereas, in direct mutual funds, there are no commissions involved. In the comparison between direct vs regular mutual funds, a regular one is an ideal option for the newcomers because they get to decide after seeking advice from professionals. The regular plan seems costly, but the tiny amount of additional cost can be beneficial for the long run. In the regular plan, your financial advisor will do all the research for you to help you make well-informed decisions. 

Advantages of Regular Mutual Funds over Direct Mutual Funds

Even though there are prominent differences between direct and regular mutual funds, and the latter seems costly because of a slightly higher expense ratio and lower returns, there are quite a few advantages of choosing this over direct mutual funds.

Convenience

Investing in mutual funds is not as easy as it appears to be. An investor has to assess their profile based on the risk and financial needs and find the mutual fund that matches their criteria before investing in the mutual fund. And this whole process takes a lot of research and is fairly time-consuming. A financial advisor will make the process effortless because they already have the knowledge of the existing mutual funds and help you find your best match based on your profile.

They will also guide you through your investment journey and impart their market knowledge to you. When it comes to direct mutual funds, the investor will have to do all the research themselves because they will not get this benefit. Thus, investing in a regular mutual fund is a smarter and much more convenient option.

Regular Portfolio Monitoring

As an investor, it is quite a task to keep up with the dynamic and fluctuating markets regularly. Thanks to regular mutual funds, intermediaries will do all the monitoring for you. Your advisor will keep track of the ever-changing market and monitor your portfolio regularly. They will also advise on restructuring your portfolio if required. On the other hand, direct mutual fund investors will have to regularly keep track of the market and monitor their portfolios.

Value-Added Services

As a regular mutual fund investor, you will get a few additional services from intermediaries for your convenience. This includes providing tax proofs during tax filling, keeping a record of your investments, and so on. Unlike regular mutual funds, direct mutual funds do not offer these additional services.

Conclusion

Direct vs regular mutual funds, which one is more beneficial, isn’t the question here. The main question is, which scheme suits you well?

If you are an experienced investor with proper market knowledge, regular mutual funds will not add any extra value. But, if you are new, it’s smarter to invest in a regular mutual fund because of the security, value-added service, and convenience it provides. Your advisor will continuously monitor and rebalance your portfolio to generate higher returns from your investments. Yes, you will have to pay a convenience fee, but it will be nothing compared to the service and returns you will get.

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