A mutual fund can be described as a direct mutual fund if you purchase it 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.
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 brokerage and commissions. As a result, the involved expense ratio for direct mutual funds is also low, and returns are relatively high. 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 agent. 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.
Regular vs Direct Mutual Fund
Direct and regular mutual funds can be differentiated based on these 5 major parameters.
| Parameters | Direct Mutual Funds | Indirect Mutual Funds |
| Involvement of intermediary | You can park your money into direct mutual funds without involving any broker, third-party agent, or advisor. | You can invest in indirect mutual funds only through third-party intermediaries. |
| Expense ratio | The expense ratio accompanying direct mutual funds is lower when compared to the ER levied on indirect mutual funds. | The expense ratio accompanying indirect mutual funds is relatively higher. |
| Returns on investment | You can generate relatively higher returns on direct mutual funds when compared to indirect fund schemes. | The returns on indirect mutual fund investment are relatively lower. |
| Net Asset Value (NAV) | The NAV of direct mutual fund schemes is higher than that of indirect mutual funds. | The NAV of indirect mutual funds is lower when compared to direct fund schemes. |
| Investment advice | You do not necessarily avail any additional investment advice or suggestion when parking money into any direct fund schemes. | When you invest in regular mutual funds, you also avail professional advice and timely suggestions from experienced fund managers. |
Returns on Direct and 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.
Here are two simple examples to explain the same –
For 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.
For 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.
Reasons to Choose Direct Mutual Funds Over Regular Mutual Funds
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.
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.
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.
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. In case you are interested in direct mutual fund schemes such as Navi Nifty 50 Index Fund, you can invest in it through https://www.navimutualfund.com/ in a hassle-free manner.
Final Word
The key difference between direct and regular mutual funds highlights the advantages of investing in the former over the latter. Regardless, you must make a pick based on your capability to shoulder risk, among other factors.
Frequently Asked Questions
Who is responsible for market research in direct funds and regular funds?
In the case of direct mutual funds, investors are solely responsible for conducting market research about the funds in question. Conversely, for regular funds, investors avail market advice from experienced professionals.
What is the point of difference between direct and regular plans in terms of commission to brokers?
Investors do not have to pay commission for direct mutual funds due to the non-involvement of any broker. Conversely, in the case of a regular mutual fund, the commission can range from 1-1.25% of the redemption or maturity value.
What is the role of a financial advisor in a direct plan?
In direct plans, individuals invest in mutual funds independently and without involving any financial advisor as such. Accordingly, the role of a financial advisor in such a plan is very limited.
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