Direct vs Regular Mutual Funds: Key Differences
All mutual fund schemes come with two types of plans – direct plan and regular plan. The key difference between direct and regular mutual funds is the former entails direct investment via the AMC (Asset Management Company) while the latter calls for investments via third-party entities.
So, before investing in mutual funds, it is important that you know the differences between regular and direct mutual fund schemes so that you can make an informed decision while investing. Let’s dive in!
What are Direct Mutual Funds?
In direct mutual funds plans, investors purchase fund units directly from the AMC (Asset Management Company). There are no third-party entities involved in the transaction. The direct plan of a mutual fund will have a separate NAV (Net Asset Value) from its regular plan.
Since there are no third-parties involved, you don’t have to pay any additional commission or fee while purchasing mutual fund units. This lowers the total expense ratio of your mutual fund scheme and lets you utilise a large portion of your investment corpus efficiently.
However, since investing in direct mutual fund schemes requires considerable research, mostly seasoned investors prefer such plans.
What are Regular Mutual Funds?
When investors purchase a scheme via third-party entities such as mutual fund distributors, brokers and bankers, it is referred to as a regular plan. The intermediary receives a distribution fee and commission from the AMC, which is incorporated into the plan.
As a result, the regular plan of a mutual fund has a higher expense ratio compared to the direct plan. This raises the overall cost of the fund. The main advantage of regular plans is that intermediaries advise investors on which schemes to opt for and help them with the entire investment process.
Direct vs. Regular Mutual Funds: Key Differences
Refer to the table below to understand the key differences between direct and regular mutual funds:
| Parameters | Direct Plan | Regular Plan |
| Investment | Investors directly invest in a plan of a fund house | Investment is made through third-party intermediaries |
| Expense Ratio | Lower (Investors don’t have to pay brokers/agents) | Higher |
| NAV | Higher | Lower |
| Returns | Higher | Lower |
| Market Research | Investor conducts the market research and makes investment decisions | The mutual fund distributor/broker/banker conducts the market research |
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Direct vs. Regular Plans: Which One to Choose?
The answer to this depends on your expertise as an investor and your investment goals. The most crucial distinction between regular vs direct mutual funds is that direct plans have a lower expense ratio compared to regular plans as investors don’t have to pay fees to the intermediary. The NAV of a direct plan is also higher than regular plans. However, it should not be the sole factor guiding one’s investment decision.
Experienced investors who wish to deal directly with the fund house should opt for direct plans. But, investors who have just started out and wish to seek the guidance of distributors/brokers and other intermediaries may want to invest in a regular scheme.
These experienced investment advisors help investors choose the right funds depending on their risk appetite and investment goals and help with making investment decisions.
So, the decision to choose between direct and regular mutual funds depends on your risk appetite and how much research you are willing to do for your investments.
Advantages of Direct Funds
Here are some of the main benefits of investing direct mutual fund plans:
- The absence of third-party entities considerably reduces the total expense ratio.
- Initially, the difference in the expense ratios of direct and regular plans may seem minimal, but over time, the compounding of returns leads to significant profits.
- The NAV (Net Asset Value) of a direct mutual fund is higher than that of a regular scheme because investors don’t have to pay brokerage fees.
- Since the expense ratios of direct plans are lower than regular plans, a large chunk of your money goes directly into investments.
Advantages of Regular Funds
Here are some of the main benefits of investing direct mutual fund plans:
- Advice from registered investment advisors makes your investment decision easier and convenient.
- Enjoy additional services from intermediaries like proof of investments while filing tax returns and maintaining a record of investments.
- Intermediaries monitor the market regularly on investors’ behalf.
- Sound advice from professionals during market downturn.
Final Word
Regardless of the differences between direct and regular mutual fund plans, you must make a pick based on your capability to shoulder risk, among other factors. If the cost of funds matters to you, you could go for direct plans.
Similarly, if you think that you need suggestions based on your investment goals, you could go for regular plans. Either way, your main goal should be to invest in the right fund, diversify your portfolio and think long-term.
Happy investing!
FAQs
Ans: Only the investor is responsible for conducting the necessary market research before investing in a direct mutual fund, as no third parties are involved. Conducting thorough market research for a regular plan is the responsibility of third-party entities such as mutual fund distributors/bankers/brokers.
Ans: Investors don’t have to pay commissions to brokers for investing in direct plans because they deal directly with the fund house. However, investors who opt for regular mutual funds have to pay brokerage or commission because they have availed the services of mutual fund distributors/brokers/bankers.
Ans: Generally, financial advisors advise their clients about which scheme to invest in to get the best returns for their financial objectives. But, when it comes to a direct plan, only the investor is responsible for choosing and investing in a particular mutual fund. Financial advisor as such. Accordingly, the role of a financial advisor in such a plan is very limited.
Ans: TER (Total Expense Ratio) refers to the total expenses involved in managing a mutual fund. It is calculated as the average NAV of a mutual fund scheme. The difference in the TER of a regular and direct plan generally ranges from 0.5% to 1%. TERs of direct and regular plans are disclosed in the monthly fund fact sheets published by the scheme.
Ans: Investors can change plans by sending a request to the fund house. But, the switch will be treated as a normal redemption.
So, if someone wishes to switch within the exit load period, he/she has to pay the exit load. If someone changes plans after the exit load periods, there won’t be any charges. Switching from regular to direct plans will also have tax consequences.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
