Direct Vs Regular Mutual Fund: It Is More Essential To Choose The Right MF Than To Invest In A Direct Scheme
If you’re new to mutual funds or you don’t have the time to dig deep, it’s quite natural that you’d be confused by selecting the right mutual fund plan that suits your financial objectives. The market is flooded with many mutual fund plans that have a variety of categories and sub-categories that address various asset classes, investment styles, subjects, risk profile, etc. It makes zero in on the right plan particularly tricky. A financial advisor who is also a mutual fund distributor sometimes has to help his/her customers make the right financial choice. This advice is not free; the fees of a financial advisor come from mutual fund asset management companies (AMCs) in the form of upfront and trail commissions. Asset management companies pass these costs on to their clients as expenses that reduce the net asset value (NAV) of the underlying plan. It is the main reason that buying mutual funds directly from AMC is cheaper than choosing a direct plan through a financial advisor/mutual fund retailer.
Comparing the direct and regular plan, we analyze the yields of the same mutual fund scheme in which the direct mutual scheme gives about 0.5–1 percent higher returns than the standard one. However, choosing the right fund is more essential than getting caught up in the regular discussion of direct verses, because if you invest in a fund, you will lose more cash than investing in the regular mutual plan of an appropriate fund.
Signs such as greed and fear, affect the equity investment pattern of most people, especially inexperienced retail investors. As a result, after seeing that current investors have achieved enhanced yields, they invest in equities when the industry is growing and approaching the peak. At this stage, however, mutual funds (MFs) have schemes that move up the graph of high-risk equity funds, inexperienced investors invest out of greedily in such funds.
However, if the market improves, such funds will have to be liquidated, which will adversely affect investors who have taken undue risks by investing in risky funds. Again, by freeing the funds from fear, such inexperienced investors will end up booking huge losses. While returns on investment through systematic investment plans (SIPs) are less affected by market volatility, inexperienced investors are even stopping SIPs seeing short-term negative yields.
While the difference between a direct and regular plan is marginal, in the long run, the difference in compound annual growth rate (CAGR) between a well-managed fund and unmanaged fund of the same category can be as much as 8-9%. In addition, it also calls for some research and experience to select a fund that serves the purpose of how quickly or for how long an investor needs cash.
Thus, rather than booking losses by partially selecting a wrong fund to gain more direct plan returns, inexperienced investors have invested in a regular plan before investing in a direct plan or through independent financial advisers (IFAs). Must have consulted a financial advisor before investing. Because investing through skilled financial advisors or fund managers involves ample investment cash or hefty consulting fees, investing through IFAs, which keeps track of the results of fund executives and the mutual funds they manage, retail investors becomes convenient to invest through IFAs.
