Say you have been an investor in mutual funds since over 10 years now and like how I started, you also started with ICICIDirect, Indiabulls etc - your one stop shop for all investments including mutual funds.
Beleive me, if I tell you that you should not be continuing that approach anymore. This is because around 2013 SEBI has mandated all fund houses to have a "Direct" variation of each "Regular" fund they had.
So, what are "Regular Funds"?
Traditionally, all fund houses would give commissions to brokers that have been helping them to sell the funds to the individual investors. And these commissions would come from the mutual fund corpus and hence contributes to the expense ratio of the fund. This was all done irrespective of whether you bought your fund from a nearby broker, online broker like ICICIDirect, IndiaBulls etc. or you went to CAMS/Karvy offices to make the transaction in the Mutual Fund. These are Regular funds - means broker commision is charged to expense ratio.
Then what are "Direct Funds"?
Direct funds are nothing but, the no-broker variation of the regular mutual funds. All the things remains exactly same from investment perspective - fund manager, holdings etc. However, for these funds the fund houses do not charge the commision to the Direct funds corpus, hence they typically have lower expense ratio i.e. lower cost of maintenance for the fund.
Few key facts to note
Now, with all this, you know which type of funds to buy. Beleive me, the cumulating effects of this 1% increase over a longer horizon will definitely make the difference to the corpus.
If you are not convinced on the facts and really want to see how much it would matter, check out the regular vs direct mutual funds post to see the actual power of compounding.
Beleive me, if I tell you that you should not be continuing that approach anymore. This is because around 2013 SEBI has mandated all fund houses to have a "Direct" variation of each "Regular" fund they had.
So, what are "Regular Funds"?
Traditionally, all fund houses would give commissions to brokers that have been helping them to sell the funds to the individual investors. And these commissions would come from the mutual fund corpus and hence contributes to the expense ratio of the fund. This was all done irrespective of whether you bought your fund from a nearby broker, online broker like ICICIDirect, IndiaBulls etc. or you went to CAMS/Karvy offices to make the transaction in the Mutual Fund. These are Regular funds - means broker commision is charged to expense ratio.
Then what are "Direct Funds"?
Direct funds are nothing but, the no-broker variation of the regular mutual funds. All the things remains exactly same from investment perspective - fund manager, holdings etc. However, for these funds the fund houses do not charge the commision to the Direct funds corpus, hence they typically have lower expense ratio i.e. lower cost of maintenance for the fund.
Few key facts to note
- Each fund that exists has both Direct and Regular funds
- No online Broker will sell Direct fund, it's obvious isn't it?
- Expense ratio for Direct funds is typically 50% of that of Regular funds
- %Age annual return for Direct funds is typically 1% higher that regular funds
Now, with all this, you know which type of funds to buy. Beleive me, the cumulating effects of this 1% increase over a longer horizon will definitely make the difference to the corpus.
If you are not convinced on the facts and really want to see how much it would matter, check out the regular vs direct mutual funds post to see the actual power of compounding.
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