Investors view mutual funds as a popular choice for their investing requirements as it allows them to potentially earn high returns by minimising their expenses. These are primarily suitable for those looking for guidance and personalised assistance from intermediaries.
However, while investing in mutual funds schemes, you can choose from two types of plans - Direct and Regular. Learning about the two kinds of mutual funds can be critical in choosing the right investment plan for you, helping you get the best from your investments.
Learn more about what regular and direct mutual funds are, their differences and more in the following sections:
What are Regular and Direct Mutual Fund Schemes?
Regular Mutual Funds
Here, you invest in mutual fund schemes via intermediaries such as a distributor or a broker. They may provide advice, paperwork assistance, and customer support, among other services to investors. Regular mutual funds could be ideal if you require help researching and choosing the right mutual funds as per your financial requirements.
Since intermediaries charge a certain amount of fees and commissions, utilising them can impact your overall returns, thereby increasing the expense ratio. Here are some of the benefits of opting for regular mutual funds:
- Investment decisions are made easier due to suggestions from registered investment advisors
- Intermediaries help monitor the market for good investment avenues frequently on investors’ behalf
- You can also get sound financial advice from professionals during unfavourable situations, such as during a market overturn
- Benefits of additional services such as proof of investments during tax return filing and maintenance of investment records, among others
Direct Mutual Funds
Direct mutual funds have no involvement from third-party entities, avoiding additional fees or commissions involved in the purchase and management of the funds.
This ensures that your overall expense ratio is significantly lowered, allowing you to get the most out of your investments due to efficient utilisation of funds. This is recommended for seasoned investors with a better grip on the market and without external assistance. Furthermore, they can use a SIP calculator to determine how much funds to invest.
Some benefits of choosing direct mutual funds are:
- High-profit margins due to the reduction of overall expense ratios
- Since the expense ratio is lower, a larger chunk of funds go directly into investments
- Complete control over how you wish to invest and other related decisions
Differences Between Regular and Direct Mutual Funds
The following are the major differences between regular and direct mutual funds -
Lower expense ratio
Higher expense ratio
Pre-requisite Market Knowledge
Required, ideal for seasoned investors
Not required, intermediaries help guide investors towards the best investment avenues
Higher as all funds are invested
Lower since some of the funds are used to pay various commissions and fees
Monitoring and Reviewing
Done by investors
Done by intermediaries
Net Asset Value (NAV)
Value Added Services
Multiple services are available, such as proof of investments, records, market downturn advice, etc.
Other Things to Consider Before Investing in Mutual Funds
Here are some important things to consider when investing in either type of mutual fund, which can help you make effective and informed investment decisions:
- Risk Tolerance
Depending on the type of mutual fund you choose, each features its own degree of risk. This makes it important to assess your risk appetite and invest accordingly.
- Investment Goals and Objectives
Take your investment goals and objectives into consideration. This can help you plan accordingly and make an informed investment decision.
- Fund Type/Category
There are various types of mutual funds such as debt, equity, and hybrid, among others. They are categorised based on their asset allocation. It would be wise to decide the type of investment only after you have decided on your risk tolerance and investment objectives.
- Previous Performance of Funds
While the previous performance of funds is not necessarily a sure-shot indicator of what you can expect from a specific mutual fund, it can serve as a good waypoint to determine if you are making a good decision.
- Systematic Investment Plans (SIPs)
SIPs can be a great option for investors looking to invest regularly. It helps in rupee cost averaging and reduces the impact of market volatility. You can use a SIP calculator to determine the potential return on investment you could earn over a certain period.
Choosing the right mutual fund plan can be a tedious process. However, knowing the right approach and learning more about the technical know-how can benefit you in the long run and make the best out of your investments.