- Date : 30/08/2023
- Read: 3 mins
The debate on regular vs direct mutual funds has been sparked due to the latest SEBI report, where direct mutual funds have given higher returns than regular funds to their investors.
Direct plans of mutual funds have completed 10 years, and they revolutionised low-cost investing effectively in India. As per the latest Securities and Exchange Board of India (SEBI) report, direct mutual fund investment has outperformed its benchmark in the last 10 years, while regular mutual funds have underperformed their benchmark over the same period. The key distinction between direct and regular mutual funds is their expense ratio, which is the total expense of the funds to its AUM (Assets Under Management). Regular funds have a higher expense ratio.
Highlights:
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The debate on direct vs regular mutual funds has increased due to the latest report published by the SEBI.
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The data shows that direct plans have yielded better returns than regular plans over the past 10 years.
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If you plan to invest in a direct plan, know its risks, dynamics, and asset allocation before investing, or you will end up losing on higher returns for saving 1-2% charges.
Also Read: Top equity funds to invest in 2023.
Which is better: regular vs direct mutual fund?
The following are the key distinctions between regular and direct mutual funds:
Expense ratio
The total expense ratio (TER) of direct mutual funds is lower, while it is higher in regular mutual funds. This is because regular funds must pay a commission to the third party. The expense ratio of regular and direct funds ranges from 0.5% to 2%.
Returns
The difference between the return of regular and direct plans ranges between 1 to 2%. This is because direct plans have a low expense ratio and no third-party involvement.
Net Asset Value (NAV)
NAV represents the value of one unit of a mutual fund. Direct plans have higher NAV, while regular plans of mutual funds have lower NAV.
Also Read: How to create a diversified portfolio with mutual funds?
What returns can we expect: Direct vs regular mutual fund?
According to the SEBI report, 66% of direct funds have outperformed their benchmark in the last 10 years, while 39% of regular funds have underperformed their benchmark. Direct plans beat their benchmark by 45% over the last 5 years, and only 26% of regular plans outperformed their benchmark.
Who should invest in a direct mutual fund and who should avoid it?
If you have good knowledge of different MF schemes and know what category suits your risk profile, then you can invest in a direct MF. But if you don't have prior knowledge and are unable to evaluate your risk profile and find the MF category that suits you, you should invest in a regular MF as you will get proper consultation from an intermediary.
Some of the precautions that you need to take before switching to direct MF are to evaluate its returns, and the taxes associated with it.
Find the latest article on mutual funds here.
