Even though investments in mutual funds have increased in the last few years, mutual fund penetration is still too low in India. According to experts, the main reason for low penetration is a lack of financial awareness and literacy among investors. Most investors do not have the proper knowledge of mutual funds. People need to be educated about the financial know-how of mutual funds, to increase its penetration and make mutual funds a go-to investment product for investors.
Before starting to invest, experts say, one should properly know this investment option. Mutual funds come in 2 versions – direct and regular. The difference between the two is that regular mutual funds charge a distribution commission while direct mutual funds do not charge any commission.
However, that is not the only difference that should matter to investors. According to experts, investors should know especially about each type of fund, especially direct funds since they have been gaining traction over time and require extreme caution before jumping in. To invest, either way, one first needs to understand how both direct and regular funds differ.
Here is how direct mutual funds and regular mutual funds differ:
– Returns: As compared to regular mutual funds, the returns of any direct mutual fund are always higher. This is one of the main reasons why direct funds are better as one of the key factors for investing in mutual funds are their returns. With direct mutual funds, the returns are always higher than the regular mutual funds.
– Expense Ratio: To invest in mutual funds, a fee is charged by the mutual fund company, known as the expense ratio. The expense ratio is lower for direct mutual funds.
While investing in mutual funds, most people tend to take the help of mutual fund advisors, and the fees paid to the advisor are also paid by the investors. This fee is deducted as a percentage of the investment made and varies between 0.5 per cent and 1 per cent. While investing, that fee is deducted straight from the investment amount and paid to the advisor or agent.
With direct funds, no commission fees or distribution charges can be deducted by the AMC, according to SEBI. Hence, the expense ratio is much lower as the mutual funds are not paying any commission to the brokers. In the long run, the investor saves a lot of money over their investment horizon, as compared to regular funds.
– NAV: The NAV represents the value of a mutual fund. It is determined by calculating the total assets owned, divided by the number of units outstanding, of the fund.
The Net Asset Value (NAV) of any direct mutual fund is always higher than the regular mutual funds if the fees paid to the agents can be avoided.
As direct funds have a higher NAV than regular funds of the same mutual fund, the total investment value is higher in a direct fund.
Thus, not choosing the right fund and investing in the wrong fund can cause far more damage to your returns. Keeping these aspects in mind, you need to select your mutual fund carefully.
