The investment world is witnessing a significant transformation as younger, tech-savvy investors increasingly prefer beyond regular mutual fund investments. This is due to the rise of digital platforms and increased financial literacy. Today’s investors are more informed, more cost-conscious, and more willing to take control of their financial futures than previous generations.
This evolution in investor behaviour is reshaping how people approach wealth creation and challenging conventional investment wisdom. Therefore, they are actively moving away from regular funds to direct mutual funds. In this blog, we will explore what’s driving this change.
The Preference for Direct Mutual Funds over Regular Funds
Before diving into why investors prefer direct funds over regular funds, you need to first understand the difference between them. The primary difference between direct vs regular funds lies in the presence of an intermediary and the associated costs.
Regular Mutual Funds
These funds involve an intermediary, such as a financial advisor, broker, or bank relationship manager, who assists investors in choosing and managing their investments. For their services, these distributors charge a commission, which is ultimately charged to the investor, resulting in a higher expense ratio.
This commission is deducted directly from the investment amount and forms part of the fund’s expense ratio. Therefore, regular funds, while offering convenience and expert guidance, come at a cost.
Direct Mutual Funds
In contrast, direct mutual funds allow investors to purchase funds directly from the Asset Management Company (AMC) without any intermediary. This direct approach eliminates commission fees and distribution charges, which results in lower costs and may lead to better returns.
Investors can buy these funds through the AMC’s website, by visiting their office, or via a SEBI-registered Investment Advisor (RIA). Since there is no advisory help, investors need to manage their investments. However, these funds give complete control, which appeals to those who like handling their finances.
The Cost Difference between them plays a big role in their selection. Many new-age investors have realised that even a 0.5%–1% difference in expense ratio can have a massive effect on returns in the long term. Let’s take an example:
Investment Amount: ₹10,00,000
Investment Horizon: 20 years
Expected Returns (before expenses): 12% p.a.
Expense Ratio: 2% (Regular) vs 1% (Direct)
Final corpus after 20 years for regular plan(10% net returns)= ₹67.27 lakh
Final corpus after 20 years for direct plan(11% net returns)= ₹80.62 lakh
This results in a difference of ₹13.35 lakh, which is purely due to lower costs.
For investors who are comfortable using online tools and doing their research, this cost saving is too significant to ignore.
What is Driving this Shift From Regular Funds?
Some of the reasons driving this shift are listed below:
Higher Expense Ratios
Traditional regular mutual funds, while offering the convenience of professional management and diversification, come with higher expense ratios. These higher costs are primarily due to the commissions paid to intermediaries, distributors, and agents.
Over the long term, these seemingly small differences in expense ratios can significantly erode overall returns, leading to a substantial impact on wealth accumulation.
Lack of Transparency
Some new-age investors feel that the traditional mutual fund distribution model lacks transparency regarding the commissions and fees charged.
They prefer a clearer understanding of where their money is going and how it’s being managed, which direct funds often provide by explicitly showing lower expense ratios. This desire for clarity drives them towards models with fewer hidden charges.
Perceived Underperformance
There’s a growing belief among many new-age investors that traditional funds, with their embedded costs, may not deliver optimal returns compared to direct investment avenues or actively managed personal portfolios.
This perception is fueled by readily available market data and a greater understanding of how fees impact long-term compounding.
Rigidity and Control
Traditional funds often offer less flexibility in terms of investment strategy or the ability to directly influence portfolio decisions. New-age investors, who are often more financially literate and keen on taking control, find this restrictive.
They prefer investment vehicles that allow them more agility and align with their individual risk appetite and financial goals.
Factors driving the Shift to Digital-First Platforms and Self-Management
New-age Indian investors are shifting to digital-first platforms that allow them to compare funds and offer enhanced transparency, lower fees, and a more hands-on approach to managing their investments. Here are some reasons:
Ease of Access
The proliferation of user-friendly mobile apps and online platforms has made investing incredibly accessible. New-age investors are attracted to digital platforms as they allow them to research, invest, and manage their portfolios from their smartphones. This digital convenience eliminates the need for physical paperwork or numerous visits to financial advisors.
Empowerment Through Information
The internet and social media have democratised financial information. New-age investors are often well-informed, conducting their research, comparing fund performances, and understanding market trends. This access to information empowers them to make independent investment decisions, reducing their reliance on traditional advisors and regular fund distributors.
Cost-Effectiveness
Digital platforms often offer lower transaction costs, zero commission direct mutual funds, and flat-fee advisory services, aligning perfectly with the new-age investor’s desire to minimise expenses. This cost-effectiveness is a major draw, as it directly translates to higher net returns over time.
DIY Investment Approach
A significant segment of new-age investors in India is adopting a “Do-It-Yourself” (DIY) approach to mutual fund investment. They are confident in their ability to research and manage their portfolios, often preferring to avoid advisory fees associated with regular funds. This self-directed approach is facilitated by the wealth of online resources and easy-to-use trading and investment platforms available today.
Conclusion
The shift of new-age Indian investors away from regular funds marks a significant transformation in the country’s financial landscape, driven by their pursuit of higher returns, greater control, and transparent, cost-effective investment solutions.
This evolving preference highlights a growing financial literacy and a readiness to leverage digital platforms for informed decision-making. This trend showcases the need for traditional financial institutions to adapt their offerings, embrace technological innovation, and enhance transparency to meet the demands of this dynamic investor segment.