DIY Investing Via Direct Funds; A Costly Mistake: Listen It From Experts

Riya and Neha, childhood friends with similar incomes and lifestyles, decided to start investing in mutual funds. While Riya opted for direct mutual funds after watching a few online videos, Neha chose regular mutual funds through a trusted financial advisor her family had been consulting for years.

A few years later, Riya proudly said she saved on commissions by going direct but wasn’t sure if her portfolio was performing well or aligned with her changing financial goals. Neha, on the other hand, had paid a small commission, but had peace of mind. Her advisor helped her stay invested through market ups and downs, rebalanced her portfolio regularly, and made sure her investments were on track for her goals.

That day, Riya realised something, saving a bit on fees was great, but guidance, handholding, and the right advice often made a bigger difference in the ‘long-run.’ Today, MINITIT will help you realise why choosing a regular fund can ensure a brighter future and it’s wise to avoid disasters due to investing in direct plans. Let’s go!

Difference Between Direct And Regular Mutual Funds

Let’s understand the difference between these two types of mutual funds. Direct mutual funds are bought directly from the fund company, for example HDFC Mutual Fund, Kotak Mutual Fund etc. These funds comparatively have lower expense ratios. However, you need to invest a lot of time researching and comparing the expense ratio, past performances, suitable themes and categories.

Regular mutual funds are offered from the financial advisors, certified brokers and other advanced technological intermediaries which offer better guidance, get minimal amount in the form of commission from the fund houses and filter out the best options for you depending on your goals and risk profile.

Misunderstanding Direct Mutual Funds

So direct mutual funds were introduced in 2013 by the market regulator, Securities and Exchange Board of India (Sebi) to facilitate the big corporates investing. Big corporations who have massive funds and technical ‘know-how’ were allowed to invest through direct mutual funds and save in expense ratio. While the expense ratio seems negligible or little in percentage terms, it can account for a significant value in absolute terms when you invest in hundreds and thousands of crores like big corporations. 

Hence, it seemed fair to allow direct plans for big corporations and let them save their marginal expense ratios.

However, new-age finance-influencers try to exploit this feature of direct mutual funds and manipulate the retail investors to opt for direct plans which will help them save in expense ratio over the long-term. Had they researched properly, they would have known that an investor holds direct mutual funds to the average of only 3 years.

Expense Ratios & Exit Loads

So, the whole debate between choosing a regular or direct fund started on the exit loads and expense ratio. Expense ratio is a cost of managing the fund which includes regular reshuffling and proper allocation of stocks in the fund. In the regular fund the expense ratio is little higher as it also includes the fees of financial advisors.

But making your valuable investment decisions based on expense ratio and exit load is a casual approach. Because here the real expense is your precious time and exit load does not matter when you don’t know when to exit. We have seen this in the case of Peter where he could not buy his car despite being patient and invested in the market. 

Expert Guidance: Secret Sauce of Regular Mutual Funds

Mutual Funds Sahi Hai, But Konsa? This is the most important question. There are thousands of mutual funds available in the market. How do you find out what suits your personal goals?

When you plan to buy a car, you always look for experts’ advice unless you are an expert. Same thing you do even before you buy a phone, you watch multiple YouTube review videos. However, when you get ill you don’t attempt a surgery on yourself by watching a YouTube tutorial video. Same wisdom you need to apply with your financial decisions, always remember never to be a Peter.

Regular mutual funds offer you experts’ guidance, help you to achieve your financial goals and suggest suitable funds based on your risk profile and time horizon.

Personalised Plans

When you try to find a good suitable mutual fund for yourself to create wealth for the future what do you look at? What’s the classification? We all know the market is floated with ‘Most Bought Funds,’ ‘High Returns,’ and everyone’s favourite, ‘Low Expense Ratio.’

Here, everything is based on either past performance or on the short-term market trend when your goal is clear for the future and long-term.

Let us ask you, if we select our investment using the most bought funds, last year France was the most visited country. How many of us would like to go to this same destination? Best Performing fund let’s come to this. Last year KSE-100 which is a benchmark index of the Pakistan Stock Exchange delivered 84% returns, would you like to invest based on the past performance?

The answers are not tough, the goal is not to invest in the most bought fund rather to have a goal-based investing to fulfil your dreams. And everyone has a different need and dreams, where investing under a professional guidance plays an important role.

Direct Plan vs Regular Plan, A Reality Check

Many DIY investors choose direct plans by picking either top-rated funds or the ones that delivered the highest returns in the recent past. MINTIT wanted to test how this approach fares compared to a well-constructed basket of regular plans recommended with proper asset allocation and strategy.

So, MINTIT picked the top-rated funds at that point and the highest-returning funds based on past 1-year performance. Then, it compared their long term performance with a carefully chosen basket of regular plan funds, built to reflect reasonable diversification and long-term discipline.

In both cases, the direct plans chosen based on ratings or past returns did not outperform the selected basket in 5-year, 7 year & 10 year timeframes. In fact, the chasing of past performance proved to be counterproductive, as some of the highflyers saw sharp reversals, while a few top-rated names dropped off the radar.

On the other hand, the regular plan basket, selected with no excitement, just sensible diversification, held up well and delivered more consistent and risk-adjusted returns.

DIY investing through direct plans by chasing stars (top ratings or recent returns) may look tempting but rarely leads to sustained outperformance. A disciplined, diversified approach guided by experienced professionals or mutual funds distributors (MFDs) can protect investors from behavioural traps and deliver better outcomes over time.

Time Is Money

Investing in the market seems to be easy, but overdiversification can be injurious to your financial well-being. Keep investing simple with doing your SIPs but don’t overdiversify it by selecting the funds based on two-three factors.

Focus on investing with the conviction and acceptance that our ability cannot beat the skill of a full-time investment expert, rather spending hours on researching funds, tracking past performance and trying to predict the market trends.

So, don’t be “Penny wise, Pound foolish”.

It is better to take financial advice when you invest your hard-earned money. MINTIT, India’s only dedicated Mutual Fund Platform caters to your personalised goals and accompanies you to achieve your financial milestones is eager to help you build your wealth. Depending on your profile it precisely suggests tailored investing plans to achieve your goals. Whether it is to save for a wedding or saving for a car, MINTIT helps you to navigate.