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Direct Vs Regular Mutual Funds. Which is better?

Beginners are often torn between Direct Vs Regular Mutual Funds. Every mutual fund is available to investors in two versions – Direct and Regular.

Regular plans involve an intermediary who manages the investments on the behalf of the investor, whereas in the direct plan, the investor directly deals with the AMC (as shown in the figure).

These versions are only the options available to the investor in the market which are offered by the same fund.

The invested amount from both options is managed by the same fund manager and has the same allocation of the assets in the fund’s portfolio.

Only the road taken by the flow of money from an investor to the AMC is a different one.

Direct mutual funds vs Regular mutual funds

Here are the main differences between direct vs regular mutual funds

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1. Direct Mutual Fund

Direct Plan is directly offered into the market by the AMC (Asset Management Company) or the fund house.

The investor can perform his/her own research based on their risk appetite, time horizon, and goals and then make a choice based on these parameters.

There is no distributor or intermediary involved, hence reducing the expense ratio (management fees charged by the fund house to the investors).

These plans can be easily identified as they are prefixed with the word “Direct” as a part of their name. The investors can choose an offline or an online mode to buy units of the fund.

Investors who can perform their research, and who also have the time and capability for managing their portfolio, prefer these plans.

2. Regular mutual fund

Regular Plans involve an intermediary and the investors invest through these distributors into the fund offered by the AMC. The intermediaries charge a commission or fee for their services to the fund house.

This fee is charged to the investor as a part of the expense ratio, hence the net fee when compared to direct mutual funds.

Due to the higher expense ratio, the returns tend to be lower than the direct plan counterparts. These plans provide convenience and are preferred by investors who have lesser knowledge about the markets.

Parameter of differenceDirect Mutual Fund PlanRegular Mutual Fund Plan 
Expense RatioLowerHigher
NAVHigher than RegularLower
ReturnsHigherLower
IntermediaryAbsentPresent
Financial/Investment AdviceNoneAvailable and provided by the advisor
Research on where to investSelf – To be done by the investorProvided by advisor

Why are Direct plans better?

1. Lower expense ratio 

Did you know that you pay for the financial advice that the distributor gives you? The intermediaries charge it to the fund house as a commission.

But this commission paid to the advisor is charged as a part of the expense ratio to the investor. Hence, the investor indirectly pays the intermediary.

The fee which is deducted for the advisor varies from 0.5% to 1%. In the case of a direct mutual fund, there is no intermediary, hence there are no distribution charges or commissions to be paid, resulting in a lower expense ratio.

Over a longer horizon, the small % of fees paid out of your pocket makes a large difference to the final corpus that is accumulated. 

Consider the Axis Bluechip fund which has earned the following returns over the last 5 years and has beaten its benchmark (Nifty 50 TRI).

Consider two scenarios where the investor invests Rs 10 lakh into this fund through a Direct plan in one case and in a regular plan in the other.

However, the small difference of 1.44% leads to a large change of Rs 1.36 lakhs to the final wealth that is accumulated. (Data of returns are from AMFI website)

ParametersDirectRegularDifference
5-year returns18%16.56%1.44%
Initial Invested Amount10,00,00010,00,0000
Final Corpus accumulated  22,87,758   21,51,531     1,36,226 

2. Higher Returns

The returns from a direct plan are always higher than the returns from the regular plan, owing to the higher expense ratio. Returns being one of the most important factors for cherry-picking the fund of your choice, this difference should be taken into consideration.

Some of the examples of the funds are as follows: (Data of returns are from AMFI website)

5-year returnsDirectRegular
Axis Bluechip Fund18%16.56%
Aditya Birla Sun Life Mid Cap Fund 12.56%11.53%
Axis Small Cap Fund19.70%18.17%

3. Higher NAV

Net Asset Value or NAV = Assets of the fund – Liabilities of the fund / Number of units of the fund

The assets owned by the fund include equity or stocks invested by the fund, debt instruments such as debentures or government securities, and cash.

The liabilities of the fund include money owed to banks, fees to distributors or other associated entities, etc.

In the case of the direct plan, due to the absence of the fees, the Net Assets (Assets – Liabilities) are higher resulting in a higher NAV.

Whereas in the regular plan the fees/commission to the distributor or intermediary forms a part of the liabilities, reducing the NAV. A higher NAV would imply a higher investment value.

Differences between Direct and Regular Plans 

The key difference between direct and regular mutual funds: 

Net Asset Value (NAV): The key difference between direct and regular mutual funds is NAV. NAV of a direct plan is higher than the regular plans. This means that the value of your investment is more in a direct plan than in a regular plan.

Returns: Returns are likely to be higher in direct plans over regular plans. This is because regular plans charge a fee for the advisory role and that can affect your overall investment value.  

Role of financial advisor: Direct plans do not offer financial advisory services or expertise. You are required to research by yourself, determine the best fund, and time the market to understand the best time of investment and exit.

All these decisions and market research is taken care of by professionals with regular funds. These are regularly monitored and adjusted to help fetch the best returns in the market.  

Direct Plan – Mutual Fund Regular Plan – Mutual Fund 
Higher Returns Low Returns 
Low expense ratio High expense ratio 
NAV- High NAV – Low 
Self-Researched & Monitored Researched & Monitored by Advisor 
Advice is not provided Advisory services provided by experts 
SIP/Lumpsum available SIP/Lumpsum available 
 

FAQs

Which is better direct or regular mutual fund?

Direct mutual funds offer higher returns in the long run to investors. However, investing in mutual funds requires market research and financial expertise which is offered by a regular plan. Both are good investments and benefits are likely to vary based on the investor and their choices.

What is the difference between direct and regular mutual funds?

In regular mutual funds, AMCs are required to pay a commission to the brokerage. This is not the case under a direct mutual fund. Direct funds have lesser costs involved, a higher NAV and are do-it-yourself funds where the investor must make investment decisions on their own.

Why Invest in a Regular Plan of a Mutual Fund?

The biggest benefit of a regular plan in mutual funds is the financial advice offered by the Fund house. This can have a huge impact on your returns and you can get closer to your financial goals more efficiently.

Conclusion

In conclusion, apart from the above benefits, one is always in control of their investments and is also well informed about the turbulences in their portfolios and aids in taking an active approach towards the financial goals.

A tiny % of difference can multiply into a larger difference in the final returns from your portfolio. One can learn about the AMC, the mutual fund options available that suit your risk profile from the services offered by wealth management sites such as EduFund, with a minimal fee, when compared to the expense ratios of a regular plan.

The next time that you plan on investing in a mutual fund, go for a direct plan. It will surely involve some initial research and some preliminary work, but you would be able to reap long-term benefits from making this wise choice.

Consult an expert advisor to get the right plan

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