Investing in mutual funds is one of the most popular ways to grow wealth and generate income over the long term. With the availability of a wide range of mutual funds, it has become accessible to every type of investor, from beginners to seasoned professionals.
While mutual funds offer numerous benefits, it is essential to choose the right type of mutual fund for your investment goals. The two most popular choices available are regular and direct mutual funds.
This article delves deeper into the workings of regular and direct mutual funds and explores which option is better suited for you.
What are direct mutual funds?
Direct mutual funds are those that are bought and sold directly from the fund provider, with no participation from third-party intermediaries such as brokers or financial advisors. Investors are responsible for investigating and selecting the fund of their choice, as well as purchasing the fund directly from the mutual fund firm. This enables investors to avoid the sales fees associated with traditional mutual funds.
What are regular mutual funds?
Regular mutual funds are those purchased through a third-party intermediary, such as a broker or financial advisor. In order to buy the mutual fund, these investors must pay sales commissions to their intermediary. Because sales costs can be substantial, many investors prefer to invest in direct mutual funds to avoid these expenses.
Regular vs direct mutual fund – Key differences
- Expense ratio
One of the significant factors that differentiate direct and regular mutual funds is the expense ratio. The expense ratio represents the fees charged by the mutual fund company to manage the fund. In the case of regular mutual funds, the fund is sold through third-party intermediaries such as brokers or financial advisors. As a result, a part of the expense ratio goes towards the commission or fee paid to these intermediaries for their services. This means that regular mutual funds could have a slightly higher expense ratio compared to direct mutual funds. On the other hand, direct mutual funds are sold directly by the mutual fund company, and there are no intermediaries involved. Therefore, the expense ratio for direct mutual funds is usually lower than that of regular mutual funds. It is important to note that even a small difference in expense ratio can have a significant impact on the returns over the long term.
- Financial advisor
One of the advantages of purchasing mutual funds through a broker or financial advisor is that it can be personalized according to your needs. A financial advisor can assist you in selecting the right mutual fund for your portfolio based on your investment goals and risk tolerance. They can also help you navigate through the various mutual funds available in the market and provide you with advice on which ones to invest in.
On the other hand, with direct mutual funds, you are solely responsible for choosing a fund that meets your investment needs. This could be a bit more challenging for novice investors who may not have much knowledge about mutual fund investment and the market. However, with a little research and effort, even novice investors can select a suitable direct mutual fund that aligns with their investment goals and risk tolerance.
Both regular and direct mutual funds have their advantages and disadvantages. Regular mutual funds are ideal for investors who prefer personalized advice and guidance from a financial advisor. Hence, consider your personal situation before choosing one to invest.