Why "Direct" Mutual funds?

 

I have always received this question from friends and colleagues so decided to address it. People say they are better off choosing a regular mutual fund from a bank rather than buying direct mutual funds online since they trust their bank more than any online apps, there is no good or bad here, you need to understand your goal and requirements. 

The one other thing everyone needs to know is neither the banks nor the apps hold your mutual funds, your mutual funds are held in digital form in an account by NSDL/CDSL, these are the 2 national security depositories that hold your stocks, bonds, and mutual funds in digital format and mutual funds are also held with the AMC you invest in and all the AMC's are regulated by SEBI (securities and exchange board of India) similarly, as all banks are regulated by RBI.

Now let us understand the difference between a regular mutual fund and a direct mutual fund.

Particulars	Direct Plan	Regular Plan
Expense ratio	Lower	Higher (commission to the intermediary)
Advice/Guidance	No	Yes
NAV	Higher	Lower
Research & market knowledge required	Perfect for the market and investment savvy	The qualified intermediary guides as per the individual goals and risk appetite
Convenience	Less	More
Returns	More as the expense ratio is lesser	Less as the AMC fee is more

                                                                                                  

Every Mutual fund provides both Regular and Direct plans, they invest in the same plan, the fund's manager is also the same, but the return will differ as the expense ratio in the case of regular mutual funds is higher due to the commission of the intermediary. I see people seeing the graph on the app or AMC website and investing in it as the graph is in upward trends, let me address the points to be considered while choosing a mutual fund.

1. Most important is your goal, the risk profile you hold, and the time horizon.
2. The Fund Manager and his past performance.
3. Expense ratio
4. The total AUM (Asset under management)
5. Exit load 
6. SIP,SWP and STP options.
7. Other technical metrics include Information ratio, Sharpe ratio, Treynor ratio, and capture ratio.
8. Checking both Absolute returns and CAGR.
9. Liquidity of the fund.
10. Tax implications on the fund.

We will dig deep into the above concepts in future articles, please reach out to me at prathikkalasapur@gmail.com for any queries.