Knowledge bank

Direct vs Regular Mutual Fund

Marisha Bhatt · 28 Jan 2025 · 6 mins read · 0 Comments
Share

direct-vs-regular-mutual-fund

Investing in mutual funds is now quite easy, and with advanced technology, it is literally at the tips of your fingers. However, there are some basic questions that you may need answers to. For example, did you know mutual funds are also classified as direct and regular mutual funds? What do these categories of mutual funds mean and what is the difference? Read on to get answers to these questions and more on direct and regular mutual funds in this blog. 

What are Direct Mutual Funds?

What are Direct Mutual Funds

Direct mutual funds are a way of investing in mutual funds without involving intermediaries like brokers or financial advisors. When investors choose a direct mutual fund plan, they invest directly through the Asset Management Company (AMC) or fund house via their website, mobile apps, or office. This eliminates the distributor’s commission or fees, which are included in the expense ratio of regular plans. As a result, direct plans have a lower expense ratio leading to a lower cost of investment which eventually translates into more savings passed on to the investor. Over time, this difference can significantly boost the returns due to compounding. Direct mutual funds are ideal for investors who are comfortable researching and selecting funds independently and are looking to maximise their returns while keeping costs low. However, the primary requirement is to be well-informed about the financial goals and the funds that align with them for optimum investment and desired results.

Pros and Cons of Investing in Direct Mutual Funds

After learning the basic meaning of direct mutual funds, here is a list of its pros and cons for better analysis of these funds. 

Pros and Cons of Investing in Direct Mutual Funds

 

Pros of Investing in Direct Mutual Funds

Cons of Investing in Direct Mutual Funds

Lower Expense Ratio - No distributor commission which results in higher returns over time.

Self-Research Required - Investors need to analyse and choose funds independently.

Higher Returns - Cost savings from lower fees lead to better compounding benefits.

No Advisory Support - Lack of professional guidance can be challenging for beginners.

Transparency - Direct interaction with the fund house ensures clear communication and fewer middlemen.

Time-Consuming - Researching funds and managing investments requires effort and financial knowledge

Control - Investors have complete control over their investments and decisions.

Complexity - Understanding different funds and market dynamics can be overwhelming.

Customisable - Direct access allows investors to align investments with their specific goals.

Limited Assistance - Fund houses may not provide in-depth personalised advice.

What are Regular Mutual Funds?

What are Regular Mutual Funds

Regular mutual funds are mutual fund plans where investors invest through a middleman, such as a broker, financial advisor, or distributor. These intermediaries act as a link between the investors and the fund house, helping them choose and manage their investments. They earn a commission in return for their services which is included in the expense ratio of the fund. This means regular plans have slightly higher fees compared to direct plans. With this increased cost, regular mutual funds are a convenient way for investors who prefer professional advice and assistance. This makes it an easier form of investment especially for those who are new to investing or need clarification on selecting the right funds. The advisor provides guidance on portfolio management, helps with paperwork, and offers ongoing support, making the process easier for the investor.

Pros and Cons of Investing in Regular Mutual Funds

An essential step for investing in regular mutual funds requires a careful analysis of its pros and cons. Here is a list of the same to help investors make an informed decision.

Pros and Cons of Investing in Regular Mutual Funds

Pros of Investing in Regular Mutual Funds

Cons of Investing in Regular Mutual Funds

Benefits of Professional Guidance - Advisors help in selecting funds based on financial goals and risk profiles.

Higher Expense Ratio - Includes distributor commissions, leading to slightly lower returns compared to direct plans.

Convenience - Advisors handle paperwork and provide ongoing support, saving investors time and effort.

Lower Returns - Higher costs reduce the compounding effect over the long term.

Helps Beginners - Ideal for those new to mutual funds or lacking financial knowledge.

Limited Control - Investors may rely heavily on intermediaries and have less direct engagement with their investments.

Regular Monitoring - Advisors often help track and rebalance the portfolio to align with changing goals.

Potential Bias - Advisors may recommend funds that offer them higher commissions which may not necessarily be the best for investors.

Assistance in Goal Planning - Advisors can help link mutual fund investments to specific financial goals like retirement or education and manage market volatility and tax management.

Lack of Transparency - Investors may not fully understand the fees or commissions involved.

Differences between Direct and Regular Mutual Funds

We have discussed the meaning of direct and regular mutual funds along with the essential benefits and risks of investing in them. Let us now focus on the key points between these two categories that make them distinct. 

Differences between Direct and Regular Mutual Funds

Category

Direct Mutual Fund

Regular Mutual Fund

Definition

Investments are made directly with the fund house without intermediaries.

Investments are made through brokers or financial advisors.

Cost

These funds have a lower expense ratio making it cost-effective especially for long-term investors.

These funds have a slightly higher expense ratio leading to lower compounding benefits for investors.

Return 

Higher returns as compared to that in regular mutual funds due to lower costs. 

Returns are marginally lower than direct mutual funds due to the additional expense ratio on account of distribution commission. 

Investment process

Investment in direct mutual funds requires the investor to research and invest independently which can make it cumbersome.

Investment in regular mutual funds is through professional advisors who handle fund selection and paperwork for the investor making it relatively easier and standard. 

Control

Investors have complete control over fund selection and management.

Investors have limited control as decisions are influenced by the advisors.

Suitability

These funds are best suited for knowledgeable and experienced investors who can manage investments on their own.

These funds are suitable for beginners or those who prefer expert guidance.

How do you choose between Direct Mutual funds and Regular Mutual Funds?

How do you choose between Direct Mutual funds and Regular Mutual Funds

The choice between direct and regular mutual funds depends on many factors like the investor’s market knowledge, the time and expertise needed to navigate stock markets as well as the investment goals. Direct funds are suitable for investors who are confident in their investment choices and strategies to meet their financial goals. On the other other, regular funds are more beneficial for investors with limited market knowledge or time to manage their investments. Ultimately, the choice between direct and regular mutual funds relies on evaluating one’s comfort in financial decision-making or relinquishing control as well as seeking a balance between the returns and the cost of convenience for the same.  

Conclusion

Direct mutual funds and regular mutual funds are the two essential branches of mutual funds with their set of pros and cons respectively. However, evaluating the two options thoroughly and making an informed decision is essential for investors to have a robust investment portfolio that is in alignment with their returns and cost expectations. 

This blog talks about the two primary categories of mutual funds available for investment aiding investors in enhancing their market knowledge leading to sound investment decisions. Let us know if you have any queries on this topic and watch this space for more insights on mutual funds. 

 Till then Happy Reading!

Read More: What are open-ended mutual fund schemes?

Marisha Bhatt

Marisha Bhatt is a financial content writer @TrueData.

She writes with the sole aim of simplifying complex financial concepts and jargon while attempting to clarify technical and fundamental analysis concepts of the stock markets. The ultimate goal is to spread vital knowledge and benefit the maximum audience. Her Chartered Accountant background acts as the knowledge base to help clarify crucial concepts and create a sound investment portfolio.

0 Comments