Mutual funds are financial products that are managed by experts. They give an opportunity to investors who are willing to participate in the financial markets but do not have the time and knowledge to trade daily in the stock market. Managing mutual funds involves certain expenses and these are charged as a percentage on your investments. Mutual funds expenses typically include management fees and operating expenses like registrar and transfer agent fees, audit fees, custodian fees, marketing fees and in case of regular funds distributor fees.
What is Direct Mutual Fund?
Every mutual fund comes in two variants namely, direct and regular. Direct funds have lesser expense ratio as they do not have distributor commission. They are sold directly by the fund house. Regular funds have distributor commission included in their expense ratio as they are sold by distributors for wider reach.
Direct Vs Regular Funds
Direct and regular funds are two separate funds but the money is managed in an identical manner. It’s like buying a shirt in a store vs the factory outlet. The difference between direct and regular mutual fund is the cost. Technically the shirt serves the same purpose whether it is bought in a factory outlet or a store. It’s only cheaper in a factory outlet. I wish I can say that it’s the same for mutual funds too. The major difference is the expense ratio for direct and regular funds. But they come with their own set of advantages and disadvantages.
One might think they can earn higher returns with lower expense ratio if they pick up direct funds. But what direct mutual funds lack is continuous monitoring. Regular funds are continuously monitored by the advisor. They suggest their clients a portfolio which best suits them and is profitable. They rebalance the portfolio when needed to meet client goals. Whereas in direct funds the investor himself has to do all this. You see the real difference here. Let us look at the advantages and disadvantages of direct funds.
Advantages of Direct Mutual Funds
- Low Expense: The fee that the fund managers charge for managing the fund is the expense ratio. The expense ratio is lesser for direct mutual funds when compared to regular mutual funds. AMCs pay commissions to agents for their services for regular funds, which is added to the expense ratio.
- Higher NAV: The Net Asset Value (NAV) of a mutual fund is the per-unit market price of all the securities held by the scheme. In other words, it is the ratio of the total value of assets to the number of units outstanding. The assets include equity shares, debt instruments like bonds, treasury bills, cash etc. Therefore, the NAV of direct mutual funds will be higher than regular mutual funds as there is no distribution commission.
- Higher Returns: The expense ratio of direct funds is lower than regular funds as there is no commission or brokerage involved in direct funds. Hence, direct funds yield slightly more returns than regular funds.
Disadvantages of Direct Mutual funds
- Difficulty in Selecting Schemes: There are several mutual fund schemes offered by various AMC’s in India. It is not easy to select one scheme in all the suitable schemes. Often, direct investors select schemes based on past performance without analysing other factors.
- Decision Making: The investment portfolio needs to be monitored regularly, and suitable alterations must be made depending on market conditions and investors financial objectives. However, direct investors may fail to make decisions at the right time at various stages of investment tenure. Thus, such decisions may impact the wealth creation journey in the long run.
- Investor Bias: Direct investors tend to develop particular biases, which may eventually affect the investment portfolio. For instance, investors concentrate on similar category funds or funds they develop a liking for without getting into the basics. Thus, a biased investment decision may neglect asset allocation and other basics, leading to expensive mistakes in the long run.
The only difference between a direct fund and regular fund is the expense ratio. Their portfolio and investment strategy has no difference. However, the benefits of regular funds out weights that of the direct ones. Therefore, it’s in the hands of the investor to choose wisely.
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