5 Key Direct Vs Regular Mutual Fund Differences You Must Know

Mutual funds

Mutual fund plans could be segregated into two types – direct plans and regular plans. These two plans differ in terms of how you purchase, the ongoing price (total expense ratio) and Net Asset Value (NAV) or the fund’s price. Direct mutual funds are purchased directly from an Asset Management Company (AMC). Conversely, when you purchase mutual funds through intermediaries such as advisors, brokers, and other third-party agents, they are categorised as regular mutual funds. In such cases, the mutual fund companies or AMCs pay a certain commission to the intermediaries or aggregators. This eventually increases the expense ratio of the fund, thereby making regular mutual fund plans costlier than direct mutual fund plans. Read along to find out more about direct vs. regular mutual funds – key differences and which category is better between the two.

What are Direct Mutual Funds? 

Direct mutual funds can be obtained from asset management companies or fund houses without any involvement from third-party entities such as brokers and agents. Accordingly, this allows you to save on expenses which would have been otherwise considered as additional costs pertaining to brokerage and commissions. As a result, the expense ratio for direct mutual funds is also low. Notably, the expense ratio is the total portion of fund assets that is used to account for management, administrative, advertising, and other expenses. 

What are Regular Mutual Funds? 

Units of mutual funds belonging to this category have to be purchased via a third-party in the form of aggregators, brokers, etc. The intermediaries involved levy fees/commission on the fund house to sell their mutual fund schemes. 

Accordingly, the fund houses recover this added expense from investors in the form of an expense ratio. Though the cost of investing in regular mutual funds is often higher, funds belonging to this category are more suited for new or inexperienced investors. This is because such investment schemes allow investors to seek professional advice at a nominal fee.   

Difference between Direct and Regular Mutual Funds

Direct vs. regular mutual funds can be differentiated based on these 5 major parameters. 

Returns on Direct vs. Regular Mutual Funds 

The returns on direct fund mutual funds are higher than that of one regular mutual fund. This is because of one thing – the non-involvement of any intermediary. 

To elaborate, you can park money in direct mutual funds without appointing any broker or other third-party agent. Accordingly, fund houses/AMCs do not need to recover the additional charges they have paid to intermediaries for selling their fund schemes. 

This, in turn, does not inflate the expense ratio that accompanies the mutual funds under this category.  As the expense ratio charged on direct mutual funds is relatively less, it does not eat into your returns on investment.

Alternatively, the expense ratio accompanying regular mutual fund schemes is relatively higher. This is because fund houses charge to recover the commissions and fees paid to brokers through the expense ratio they levy on investors. These impact the returns on investment generated on regular fund schemes.

Also Read- Balanced Mutual Funds

Here are two simple examples to explain the direct and regular mutual funds:

1. Regular Mutual Funds

Suppose Rohan invests Rs.5,000 per month in an equity mutual fund through a broker via

the SIP route. Let us assume the investment horizon is 36 months, whereas the

annualised return and expense ratio is 12% and 2%, respectively.

So as per the SIP formula,

M = P × ({[1 + i]n – 1} / i) × (1 + i)

Here,

M is the amount received on maturity

P is the sum invested at regular intervals, i.e., Rs.5,000

N is the number of payments, i.e., 36 months

I is the rate of interest, i.e., 12%/36

After factoring in the expense ratio of 2%, Rohan’s returns will stand at 12% – 2%, i.e., 10%

Hence,

M = 5,000 × ({[1 + 10%/36]36 – 1} / 10%/36) × (1 + 10%/36)

M = Rs.2,10,650

Therefore, the invested sum is  Rs.(5,000×36) = Rs.180,000

Returns on investment is Rs.(2,10,650 – 1,80,000) = Rs.30,650

Hence, by the end of the investment tenure, Rohan will build a corpus of Rs.2,10, 650.

2. Direct Mutual Funds

Let us assume that Karan has invested Rs.5,000 monthly in an equity fund under

direct plan via the SIP route. The investment horizon and annualised return for this fund scheme are also 3 years and 12%, respectively. However, being a

direct mutual fund scheme, the fund house levies a lower expense ratio of 1%.

Similarly, as per the SIP formula,

M = P × ({[1 + i]n – 1} / i) × (1 + i)

M is the maturity amount

P is the sum invested at predetermined intervals, i.e., Rs.5,000

N is the number of instalments, i.e., 36 months

I is the rate of interest, i.e., 12%/36

After factoring in the expense ratio of 1%, Karan’s returns will stand at 12% – 1%, i.e., 11%

Hence,

M = 5,000 × ({[1 + 11%/36]36 – 1} / 11%/36) × (1 + 11%/36)

M = Rs.2,14,060

Therefore, the invested sum is Rs.(5,000×36) = Rs.180,000

Returns on investment is Rs.(2,14,060 – 1,80,000) = Rs.34,060

Hence, by the end of the investment tenure, Karan will build a corpus of Rs.2,14,060.

Now, if we look at the returns generated by the direct and regular mutual fund scheme for the same period, we notice a great difference in earnings. In other words, Karan, who had invested in the direct mutual fund scheme, managed to earn Rs.3,410 more on his investment than Rohan, who had invested in the regular fund scheme. 

Advantages of Regular Mutual Funds

1. Convenience

Investments in mutual funds is a very complex process. One must choose a mutual fund according to his/her risk appetite and investment objectives. It takes significant time and effort to choose the right mutual fund. However, an intermediary or a broker having expertise in this field may advise investors about existing mutual fund schemes and help them identify the best option for them.

2. Regular Portfolio Tracking   

Stock markets are highly volatile. Investors find it difficult to continuously monitor the fluctuations occurring in the markets. In the case of regular mutual funds, the intermediaries keep a track of the investors’ portfolio and suggest them to make necessary changes according to the market conditions.

3. Other Services

All regular plans come with an array of value added services. One opting for direct mutual funds will not receive these value added services that intermediaries provide along with mutual funds. These include tax benefit proofs, redemption assistance, advisory services, and more.      

Advantages of Direct Mutual Funds

Here are some of the advantages of investing in direct mutual fund plans: 

1. Better Returns

The returns on investing in direct mutual funds are higher than the earnings generated on regular funds. Notably, even if two individuals invest in the same type of mutual fund, the person who parked money in the direct fund scheme will earn higher returns as you need not bear additional expenses to pay the intermediaries.

2. Low Expense Ratio

As discussed, direct mutual fund schemes accompany a low expense ratio, which does not erode your returns. Accordingly, it makes the cost of investing in a fund more affordable. This gives direct plans an upper hand over regular funds in the debate over direct funds vs regular funds.

3. Higher NAV

Direct mutual funds have a higher NAV when compared to the scheme’s regular version because of the higher returns. Generally, a fund’s operating expense is deducted from its net AUM. Therefore, a low expense ratio of direct mutual funds leads to higher NAV. This is also a key point of difference in the direct plan vs regular plan debate. 

4. Control Over Investment

When you invest in a direct mutual fund, you have to interact and consult with your fund house without the involvement of an intermediary. The absence of a third-party agent encourages you to gain knowledge about procedural mechanisms. This helps to gain control over investments and related decisions. 

Besides these, direct mutual funds do not accompany any hidden charges, and the chances of getting duped by an unreliable broker or other third-party agents are nil. This makes a case for a direct fund scheme stronger when discussing direct vs regular funds. 

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Direct vs. Regular Mutual Funds: Which Is the Better Option

Direct and regular mutual fund plans are two avenues of investing in a mutual fund scheme. The scheme is handled by the same fund manager. Moreover, the underlying assets are also same. The only difference between the two is that in a regular plan the asset management companies or the fund houses pay a commission or specific charges to the intermediary. 

On the other hand direct plans do not come with any such charges so their expense ratios are lower. As a result they have a higher NAV as compared to regular plans. 

That said, NAV must not be the sole criterion that one considers while deciding which plan to choose. By choosing a regular plan, individuals can get access to expert suggestions that they can incorporate to improve the overall performance of the portfolio. The intermediary also provides redemption assistance to the investors. 

All these services come with a minimal cost. Owing to regular professional interventions, returns under regular plans are quite higher than direct plans. 

Investors must go for direct or regular mutual funds after considering their investment goals and their expertise in the field.  

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 on Direct and Regular Mutual Fund Schemes

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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.