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Investing in mutual funds often comes with decisions that first-time investors may fail to comprehend. While choosing the right mutual fund basis an investor’s risk appetite and life goals is critical, it is equally important to choose the right classification within the chosen fund.

Mutual Fund classifications can be bucketed as Growth Vs Dividend, and Regular Vs Direct.

Feroze Azeez, deputy CEO of Anand Rathi Private Wealth, explains these in Money9 Money Masterclass.

Growth Vs Dividend

In a growth option, every time there is an upward swing in the invested capital, the fund doesn’t pay the profits to the investor, but instead ploughs it back into the fund itself. It gives the investor the benefits of compounding in addition to NAV appreciation. Azeez says, “Growth is nothing but whatever you earn doesn’t get paid to you ever, it just keeps compounding inside the fund itself. The NAV from (let’s say) 10 rupees went to 12 rupees, the fund manager does not give away these two rupees to you ever, and it keeps compounding and multiplying.”

Dividend funds, however, differ with the investor taking the profits as dividends. “Dividend is when the fund manager is looking for opportunities to encash the profits and pay them to the investor,” he said.

So if an investor wants regular income or at least a sporadic inflow in his or her bank account, then Dividend is a better option. But Azeez says if you are a young person who wants to compound the money, then Growth is the best choice.

Regular Vs Direct

The other classification is based on the cost. Regular and Direct funds differ on the inherent costs associated with mutual fund investments.

“In Direct, as the name suggests, you don’t have any advisor. You take your money straight to the asset management company, cut the middleman. That’s direct. Regular is when you take advice from an advisor who can help you make money from his capability of research and give you that extra return for which you pay 1% extra in the form of fees,” Azeez told Money9.

So direct is a cheaper option, regular is an expensive option. Expensive because the intermediary gets paid in the Regular option for the advice he or she ends up giving the investor.

If an investor has selected a suitable mutual fund, the option to buy it directly is going to be more cost effective.

Switching from one classification to another.

Mutual funds are flexible and it is easy to switch between Growth & Dividend as well as between Regular & Direct. “When you switch between growth and dividend, you don’t even have an exit load,” Azeez added. “But in regular and dividend, you do have an exit load,” he said.

Azeez also added some key points regarding mutual funds for uninitiated investors:

• SIP may not ALWAYS be better than lumpsum investments. It depends from goal to goal and risk appetite to risk appetite. Consulting an advisor is recommended.
• Mutual Funds can be liquidated easily
• It is not wise to wait for a dip in markets. Investors should invest at all points in time.
• Physical assets not ALWAYS safer than financial prices. Real estate is often riskier than financial assets.
• Starting early with small amounts is usually better than starting late with a lumpsum
• Fixed deposits are considered safer than mutual funds, but over time Mutual Funds have given better returns