Direct vs regular mutual fund (MF) schemes: Four key aspects to consider while choosing between the two

Direct vs regular mutual fund (MF) investment: Choosing a mutual fund for meeting one's short- and long-term goals is not easy. Careful thought has to be involved in the decision of picking between a direct or regulator route to investing in a mutual fund (MF) scheme of choice. Direct and regular mutual fund schemes differ primarily in the way investors purchase them. Direct schemes are bought directly from the mutual fund company, cutting out the middleman and resulting in lower expense ratios, whereas regular schemes are bought through intermediaries like distributors or brokers, which may lead to higher expenses due to commissions. While direct schemes offer higher returns due to lower costs, regular schemes may provide additional services and advice. 

For starters, direct plans are available for investment directly through the fund house's own website or platform, whereas regular plans involve financial intermediaries. Direct plans—constituting a substantial 45 per cent of the mutual fund industry—are advantageous as these entail a lower expense ratio of 0.05-1.7 per cent.

Most money managers say direct plans are more suitable for well-informed investors.

However, before zeroing in on either of the options, experts suggest that an investor needs to factor in a few important aspects listed below:

1. Cost

One of the primary factors to consider when choosing between direct and regular mutual fund schemes is the cost involved.

Direct mutual fund schemes typically have lower expense ratios compared to regular schemes.

This essentially means that investors can potentially earn higher returns with direct schemes due to lower fees.

2. Convenience

Another aspect to consider is the convenience factor.

Direct mutual fund schemes require investors to manage their investments independently, including research, monitoring, and tracking performance.

On the other hand, regular schemes offer the services of a financial advisor or distributor, making the investment process more convenient for those who prefer professional guidance.

3. Risk vs return

Investors should also assess the risk and return potential of both types of schemes.

While direct schemes may offer higher returns due to lower costs, they also require a higher level of involvement and knowledge.

Regular schemes, on the other hand, provide a more hands-off approach but may come with slightly higher fees.

4. Tax implications

Tax implications are another crucial consideration.

Direct mutual fund schemes are more tax-efficient as they have lower expense ratios, resulting in higher post-tax returns.

Investors should evaluate their tax situation and investment goals to determine which option is more beneficial.

Conclusion

In conclusion, choosing between direct and regular mutual fund schemes depends on individual preferences, investment knowledge, and financial goals.

Investors should carefully weigh the cost, convenience, risk and return potential, and tax implications before making a decision. It is advisable to seek professional advice if needed to make an informed choice.