Direct vs Regular Mutual Funds: Which Offers Better Value?

Direct vs Regular Mutual Fund: Which is Superior?

Mutual funds are offered in two formats: direct plans and regular plans. A major difference is the inclusion of a distribution commission in regular mutual funds, which results in a higher expense ratio compared to direct mutual funds, which exclude these costs. The expense ratio indicates the total management expenses of the fund relative to its Assets Under Management (AUM). This makes direct mutual funds more attractive than regular ones. Several other factors also favor the choice of direct mutual funds over regular mutual funds.

Differences Between Direct and Regular Mutual Funds

• Low Expense Ratio The expense ratio, a fee charged by the mutual fund company, is significantly lower in direct mutual funds. For example, a 0.2% fee implies 0.2% of the AUM covers operational and administrative expenses. In regular funds, investors often consult financial advisors, whose fees increase the expense ratio. Skipping these commissions in direct funds reduces the expense ratio.
• Higher Returns Direct mutual funds generally provide higher returns compared to regular funds due to the lower expense ratio in direct plans.
• Higher NAV The Net Asset Value (NAV) is typically higher in direct funds. NAV, which denotes the unit value of the fund, is calculated by dividing total assets by outstanding units. Lower agent fees in direct funds increase the NAV, making them more advantageous.

Reduced Likelihood of Misguidance

While some investors value advisor guidance, full reliance may lead to misinformation. Many complaints against advisors emphasize potential risks, as their earnings are commission-driven, leading to possible conflicts of interest. Choosing direct funds minimizes these risks.

Exercise Control

Direct funds offer complete control over mutual fund investments, prompting investors to independently research mutual funds, Asset Management Companies (AMCs), KYC updates, and other investment processes. Although some prefer advisor-managed investments, actively pursuing financial goals can be rewarding. Educate yourself about your chosen AMC, compare funds, or use wealth management platforms like Groww to build a customized portfolio or choose from pre-made portfolios that suit specific needs.

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