- Date : 16/09/2023
- Read: 3 mins
Direct mutual funds are sold directly by Asset Management Companies, hence do not incur the distribution cost like Regular mutual funds and give better returns.
Introduction: Direct vs. Regular mutual fund
Small can also be significant! Direct mutual funds cost marginally lesser than regular mutual funds, and hence, give significantly higher returns over a particular span of time. While both variants pool investors’ money for investment into a diversified portfolio of securities, they differ in terms of cost, accessibility, and investor experience. Direct mutual funds are purchased directly from Asset Management Companies (AMC), whereas regular mutual funds are purchased from third parties like financial advisors, service providers, and banks. Commission paid to these intermediaries gets embedded in the expense ratio and is borne by the investors. Thus, the power of compounding this marginal increase in expense ratio makes a significant impact on returns in the long run.
Highlights:
- Direct mutual funds cost 0.5%-1.5% lower than Regular mutual funds
- Direct mutual funds are sold by AMCs, whereas Regular mutual funds are sold by third parties
- Regular mutual funds are suitable for those who lack time and market expertise
- Investments in mutual funds should be done carefully after financial planning and adequate and appropriate market research
Also Read: How mutual fund companies make money?
Direct vs. Regular mutual funds calculation
The difference in the expense ratio of Direct and Regular mutual funds varies between and 0.5% and 1.5%.
Consider SBI Bluechip Fund which has a 10-year annualised returns rate of 15%. Its Direct plan costs 0.73% less than the Regular plan. Let’s calculate both the plans' returns in the following two scenarios.
Scenario 1: Lumpsum investment
A lump sum investment of Rs. 10 lakhs over a period of 10 years under the Regular plan will amount to Rs 47.2 lakhs whereas under the Direct plan, it will amount to Rs. 51.55 lakhs.
Scenario 2: Systematic Investment Plan (SIP)
A monthly SIP of Rs 10,000 for 5 years under the Direct plan will gain Rs 19,159 more than the regular plan. A similar SIP for 10 years will fetch Rs 1.29 lakhs more in the Direct plan when compared with the Regular plan.
Are Regular mutual funds any good?
Even though investing in Regular mutual funds comes with an added cost, it is most suitable for investors who lack market expertise and the time to actively manage their portfolios. Consequently, it offers a high level of convenience to those who are not well-versed in the market, providing them with expert guidance for a modest fee.
Parting Thoughts
The choice between investing in Direct or Regular mutual funds ultimately depends on individual financial goals, knowledge of the market, and the level of involvement in managing investments. However, it's absolutely essential to carefully assess your circumstances and consult with a financial advisor, if necessary, before making a decision on the best approach for your investment journey. It's your choice ultimately!
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