Difference between Direct and growth mutual funds
In this article, we will discuss direct vs growth mutual funds. We’ll try to understand what they offer in terms of risk and return and their composition.
Growth mutual funds
As the name suggests, growth mutual funds invest in stocks of companies that have the potential to grow rapidly, thereby outpacing the market.
The main aim for investment in a growth mutual fund is capital appreciation, for which investors do not receive any dividends because the earnings are used as reinvestments in the company.
With high returns, growth mutual funds also bring about asymmetric risks. So, growth mutual funds are more suited for investors with a high-risk appetite.
Investors with a conservative approach and those with less knowledge of the market should keep away from these investments.
Growth mutual funds are highly volatile. The value of the investment might fluctuate widely, especially during market corrections.
In terms of taxation, these funds are subject to a long-term capital gains tax of 10% on profits over 1 lakh rupees (for investments held for more than one year).
Investment in growth funds allows you the diversification of companies that can multiply your money in a shorter amount of time.
Direct mutual funds
On the other hand, direct mutual funds were introduced by SEBI (Securities and Exchange Board of India) in January 2013.
The direct mutual fund plans aim to eliminate mediator involvement by channelizing your money into the fund. The absence of a mediator will add to your responsibilities as a buyer to do good research about your buying fund.
Because the transactions are done directly, the commission is absent, and as a result, the expense ratio for direct mutual funds is lower than the regular plans.
The lower expense ratio acts as a bonus for the investor, saving them the cost. However, people usually avoid direct mutual funds owing to a lack of research & awareness and end up paying a higher expense ratio (usually higher by 1 percent) and hurting their returns in the long run.
In the figure above, we assume that a fund generates 12% CAGR, then Rs. 1,00,000 lakh invested in a direct fund would amount to Rs. 3,47,855 after ten years and Rs. 3,23,073 in a regular fund we see a big difference of +7.7%. In the long term, the difference is non-ignorable.
Now, to say which one is better than the other is difficult. It depends on your willingness to spend time on what you do and your risk appetite. Use your due diligence to make your investment.