Regular funds and direct funds are two types of mutual funds in India that differ in terms of how they are sold and the fees they charge investors. In this article, we'll explore the difference between regular funds and direct funds and their impact on investors.
Regular Funds:
Regular funds are sold through intermediaries such as distributors or brokers who charge a commission or fee for their services. This fee is usually a percentage of the investment amount and is deducted from the investor's returns. The commission is paid by the mutual fund company to the distributor or broker for their services. Regular funds have a higher expense ratio due to the commission paid to the distributor.
Direct Funds:
Direct funds, on the other hand, are sold directly to investors by the mutual fund company without the involvement of intermediaries. In this case, there is no commission or fee charged by intermediaries, and the expense ratio of direct funds is lower than that of regular funds. Direct funds have a lower expense ratio as the commission paid to intermediaries is not applicable.
The Expense Ratio:
The expense ratio is the annual fee charged by the mutual fund company for managing the fund. It includes administrative expenses, management fees, and other operating costs associated with running the fund. The expense ratio is usually a percentage of the fund's total assets and is deducted from the fund's returns.
Impact on Investors:
Direct funds have a higher rate of return compared to regular funds due to their lower expense ratio. However, investors in direct funds are required to do their own research and analysis as they do not receive any assistance from intermediaries. Regular funds are suitable for investors who do not have the time or expertise to research and analyze mutual funds themselves.
Example:
Suppose an investor invests Rs. 10,000 in a mutual fund with an expense ratio of 2.5% per annum for a period of one year. In the case of a regular fund, the investor has to pay a commission of 1% to the distributor, which means that the net expense ratio for the investor would be 3.5%. Thus, the total expense incurred by the investor would be Rs. 350 (3.5% of Rs. 10,000). If the fund generates a return of 12%, the investor would receive Rs. 1,210 (Rs. 10,000 + 12% return - Rs. 350 commission).
In the case of a direct fund, the investor does not have to pay any commission or fee to the distributor, and the expense ratio would be 2.5%. Thus, the total expense incurred by the investor would be Rs. 250 (2.5% of Rs. 10,000). If the fund generates a return of 12%, the investor would receive Rs. 1,220 (Rs. 10,000 + 12% return - Rs. 250 expense ratio).
Conclusion:
As we can see, the difference in returns between a regular fund and a direct fund may not seem significant for small investments, but it can add up over time for larger investments. Therefore, it is important for investors to understand the difference between regular funds and direct funds and choose the option that best suits their investment goals and preferences.
You can get more examples of Regular funds and Direct funds from this link