Understand the difference between a Direct and a Regular Mutual Fund

Direct Vs Mutual Funds

Shares and stocks have an element of mystery around them. It can be challenging to comprehend how the stock market mechanism works. So, does it mean that people who do not know much about stocks should not invest in the market? No, it is not like that. Such people have an excellent option in mutual funds.

Different types of mutual funds allow you to explore various investment opportunities. We shall look at two options, Direct Mutual Fund and Regular Mutual Fund. You will understand the difference between the two when comparing direct vs. regular mutual funds. But, first, we shall get the definitions out of the way. It can help simplify matters a lot.

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What is a Direct Mutual Fund?

Let us clarify that all mutual funds are offered by the funding houses or the Asset management companies. When the AMC offers a mutual fund directly to the investor without involving an intermediary or a broker, it is a direct mutual fund. 

What is a Regular Mutual Fund?

In contrast, a regular mutual fund involves an intermediary between the AMC and the investor. This intermediary can be brokers, advisors, or distributors.

Direct vs. Regular Mutual Funds

This tabular format can help you better understand the difference between direct and regular mutual funds.

Parameter

Direct Mutual Fund

Regular Mutual Fund

Third-Party Involvement

There is no third-party involvement because the AMC offers the fund directly to the investor.

The Regular Mutual Fund involves a third-party intermediary in the form of brokers, advisors, or distributors.

Returns on Investment

As there is no broker fees payment, the returns on direct mutual fund investments are better.

Comparatively, the returns of the Regular mutual fund are lower because of the broker fee payable to the intermediary.

Expense Ratio

The Direct Mutual Fund has a comparatively lower expense ratio because of the absence of an intermediary.

The expense ratio is comparatively higher in a regular mutual fund because of the intermediary.

Net Asset Value

A higher ROI ensures a better NAV.

Comparatively, the NAV is lower.

Market Research

The investor has to do market research before investing in the preferred stocks.

The intermediary advisor does the research activity on behalf of the investor.

Investment Advice

The investor does not get any investment advice from experts.

The advisor provides the investment advice enabling the investor to invest correctly.

Let us look at the advantages of regular mutual funds over direct mutual funds.

The above Direct vs. Regular Mutual Fund comparison shows that the regular mutual fund has a comparatively higher expense ratio and thus offers marginally lower returns on a similar investment. However, the regular mutual fund has various advantages that make it more popular than the direct mutual funds.

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Convenience of Investment

Mutual fund investment is not as easy as investing in a chit fund like KSFE Chitty. The investor has to look at various aspects. First, one should know how the share market mechanism works. Understanding the risks and financial needs is crucial. The regular mutual fund makes it convenient for the investor by taking care of every aspect of researching the stocks and investing in the right stocks to ensure good returns on investment. The Direct mutual fund does not offer this advantage as the investor has to do everything themselves. Therefore, the regular mutual fund is more convenient than the direct mutual fund.

Professional Advice

Regular mutual fund investors can receive professional advice from experts about which profile suits them the best. A qualified advisor makes the investment journey smoother and imparts crucial market knowledge to enable the investor to earn higher returns. On the other hand, the direct mutual plan investor is on his own and makes all decisions individually.

Portfolio Monitoring

The markets keep fluctuating between highs and lows. Direct mutual fund investors have to monitor the market themselves and review their portfolio investments from time to time. The regular fund investors need not worry much about this count. The intermediary advisor looks after the monitoring and review of the investment portfolio and takes appropriate action wherever necessary. Since they are in continuous touch with the market forces, they know the trends better. Hence, the regular fund investor is placed better in this regard.

Value-added Services

Besides managing your investment portfolio, the intermediary advisors in the regular mutual fund provide value-added services like facilitating redemptions, furnishing tax proofs, maintaining proper records, etc. These services are not available in the direct mutual fund plans.

Direct vs. Regular Mutual Fund – Which is the better option?

It depends on the knowledge level of the investor. People with complete knowledge of the market forces can find the direct mutual fund a better option than the regular plans. Direct plans allow investors to formulate strategies and not rely on third-party intermediaries to manage their money.

Regular mutual funds are for the average investor who does not know much about market fluctuations and cannot make appropriate decisions on his own. The intermediary advisor brings years of experience and knowledge to manage investor funds better. However, the investor has to pay a brokerage fee on every transaction. Though it can reduce the NAV, regular mutual funds can ensure quality investment strategies. So, these funds are best for people who are not market-savvy.

Verdict – Both these options are good, depending on the circumstances.

Final Thoughts

The COVID-19 pandemic has brought the economy to a virtual standstill. Many people lost their jobs and fell into what is a debt trap. However, the economy has risen again, with the stock markets performing well. So, people are back to investing in stocks and shares. Regular mutual funds can help you make the right decisions.
This direct vs. regular mutual fund comparison should clarify all doubts you can have about investing in these funds.
In a nutshell, if you know the market well, go for direct mutual fund investments. Otherwise, play it safe with regular mutual funds.

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