What to choose? Direct or Regular Mutual Fund Investments.

“Mutual Fund Investments are subject to market risks. Please read the offer document carefully before investing.” Almost every person has heard this sentence once during his/her lifetime. There are TV commercials, online advertisements and print media advertisements for mutual funds giving the first-hand idea to investors that investing in mutual funds is not a layman’s task and is subject to market risk.

Still, in 2013, SEBI opened the direct route for investments in mutual funds for retail investors. Through the direct route, a normal investor can directly purchase units of a mutual fund without an intermediary. Though this can seem lucrative as direct plans have a higher NAV than regular plans, but does investing in direct plans really beneficial for a retail investor? Let us explore:

Decrypting the ‘Direct’ Myth
With the opening of direct investment route, a lot of investors got the opportunity to rant about high distribution expenses. For common investors, the expenses related to investment in mutual funds were eliminated with the launching of direct plans.

In a direct mutual fund plan, an AMC does not charge an investor for distributor expenses or trail fee. This creates a difference in the NAV of the direct plan and regular plan with direct plans on the higher side.

Difference in Returns: A Quantifiable Example
Does the difference in NAV really create a substantial difference in actual returns? If we take the example of a five star rated equity fund and compare the annualized returns of a direct and regular plan, the difference is miniscule. The annualized return of direct plans over these years is approximately 23.84% while in the regular plans it is 22.86%.

Direct and Regular Mutual Fund - Mfundz
Source: ValueResearch

If we compare the current value of an investment of INR 1 lakh in this fund in direct and regular plan the current value would be INR 2.53 lakh in direct plan and INR 2.45 lakh under the regular plan. This means there was an appreciation of about INR 8,000 over a period of 4-5 years on an investment of 1 lakh.

The missing link in Direct MF plans: Advisory & Guidance
When an investor chooses the direct path, he/she surely benefit from better returns, but the major problem with direct mutual fund investment is that an investor is expected to research using own knowledge and resources. No one guides an investor with regards to the timing of investment, choice of fund and the exit plan.

When an investor chooses the regular plan, he/she can rely on the expertise and experience of mutual fund advisor. Generally, MF advisors are industry veterans backed by years of knowledge and experience in the mutual fund industry. As an advisor knows how to manage mutual fund investments in a better way and have necessary resources to conduct research on an investor’s behalf, an investor is in a beneficial position owing to research-backed advisory. Not only an investor saves time on research, he/she can also earn equivalent returns due to focused and research-backed investment advisory in mutual funds.

Pros & Cons of Investing in Direct Mutual Fund Plans

• Higher rate of return (illustrated by example above)
• Building own database and resources for research
• Investing time and efforts in finding the best mutual fund plans
• Taking care of documentation and tracking of funds
• Investing without proper knowledge about market risks
• Keeping a track of Market, review investments and rebalancing of investments time to time.

When we compare the pros and cons of investing in mutual funds, directly, we realized only one visible benefit i.e. the return but the magnitude of return is not substantial to create long-term impact if you are a retail investor.

So, do we recommend the direct route? It’s very subjective because a retail investor generally is naïve in terms of making an investment decision and managing it properly. If you want consistent returns from your mutual fund investment, it is better to take help of an expert who does not only knows how risky waters are but also prepares you to handle market risks, effectively.

With Mfundz, you not only get the platform to invest and manage your Mutual Fund investments but also an effective financial advisory. Our team of advisors considers various factors like your goal, timeline to reach the goal, current asset allocation, risk profile, liquidity needs, taxation before suggesting you right mix of funds. Thus, you get best out of your investments when you select Mfundz as your investment partner.

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