Direct vs Regular Mutual Funds: What are the Differences?

Mutual funds are investment vehicles that pool money from various investors who share a common investment objective to invest in stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on behalf of the investors. When it comes to investing in mutual funds, you might have come across the terms “direct” and “regular” plans. Understanding the difference between regular and direct mutual funds is essential for making an informed investment decision.

Check out our blog “How Mutual Funds Work” to learn more about mutual funds.

Difference Between Direct and Regular Mutual Funds

The main difference between direct and regular plans in mutual funds arises from how these plans are invested and the difference in their cost structure. Let’s take a closer look at these differences below!

1. Purchase: 

This refers to the means through which you invest in a mutual fund.

  • Direct Mutual Funds: Investors buy these mutual funds directly from the mutual fund company. There are no intermediaries or brokers involved. 
  • Regular Mutual Funds: Investors buy these mutual funds through intermediaries such as brokers, financial advisors, or banks. These intermediaries act as middlemen between the investor and the mutual fund company.

2. Expense Ratio: 

This is an annual fee charged by mutual funds companies servicing their investors for management and administrative expenses.

  • Direct Mutual Funds: They have a lower expense ratio because there are no intermediary commissions involved.
  • Regular Mutual Funds: They have a higher expense ratio due to the commissions paid to intermediaries.In long run, this can slightly reduce the returns as it is directly deducted from the investment amount and paid to the advisor.

3. Net Asset Value (NAV):

It represents the value of one unit of mutual funds.

  • Direct Mutual Funds: They have a higher NAV due to a lower expense ratio. The mutual fund companies incur fees/expenses (expense ratio) which are charged from the NAV of the fund.
  • Regular Mutual Funds: They have a higher expense ratio due to commissions and brokerage fees involved, and therefore the NAV of regular plans is generally lower compared to direct plans.

4. Returns:

  • Direct Mutual Funds: They generally offer higher returns compared to regular plans primarily due to the lower expense ratio.
  • Regular Mutual Funds: Typically they offer slightly lower returns due to higher expenses incurred in this type of funds.

5. Transparency:

  • Direct Mutual Funds: The investors have direct access to the mutual fund company which allows them to have more transparency in terms of fee structure and performance of the investment.
  • Regular Mutual Funds: The investors often rely on intermediaries for information as they don’t have direct access to the fund details, hence providing lesser transparency compared to direct plans.

6. Suitability

  • Direct Mutual Funds: It is best suited for informed investors who can make their own investment decisions without much need for financial advice.
  • Regular Mutual Funds: This is ideal for investors who prefer to have complete guidance from financial advisors or brokers in choosing and managing their investment portfolio.

Regular vs Direct Mutual Funds: Explained in Tabular Form

Criteria
Direct Mutual Fund Plan
Regular Mutual Fund Plan
Purchase Method
Bought directly from the mutual fund company.
Bought through intermediaries such as brokers or financial advisors.
Expense Ratio
Lower, as there are no intermediary commissions.
Higher, due to commissions paid to intermediaries.
Returns
Generally higher due to lower expenses.
Slightly lower due to a higher expense ratio.
Transparency
More transparent with direct access to the fund company.
Less transparent as information is often passed on through intermediaries.
Suitability
Suitable for knowledgeable investors who can manage their investments independently.
Suitable for investors who prefer guidance and advice from professionals.
NAV (Net Asset Value)
Typically higher due to lower costs affecting the fund’s growth positively.
Typically lower as higher expenses slightly slow down the growth.

How to Invest in Direct vs Regular Mutual Funds

Investing in Direct Mutual Funds:

  • Online Platforms: This is possibly the best way to invest in direct plans as it is an easy and convenient option. There are various mutual fund companies offering online services through their websites or apps like Rupeezy.

Check out our latest blog “Best Mutual Fund Apps in India to learn more

  • Offline Channels: To avail of this option, an investor must visit the mutual fund company’s office and fill out the necessary forms. This is a slightly less preferred option nowadays.

Investing in Regular Mutual Funds:

  • Through Brokers/Intermediaries/Banks: Approach a broker, bank, or financial advisor who will assist the investor with the selection and purchase process. Many banks and financial institutions are offering such services in India. However, it is important to note that a select few brokers also provide direct mutual funds. 

Pros and Cons of Direct vs Regular Mutual Funds

Direct Mutual Fund Regular Mutual Fund
Pros Cons Pros Cons
Lower expense ratio Requires investment knowledge Access to professional financial advice Higher expense ratio
Higher returns over the long term No advisory support and guidance Easier for beginners Slightly lower returns
More transparency     Less transparency

Example Comparison

Let’s assume someone invests ₹1,00,000 in both the direct and regular plans of a mutual fund. The annual return before expenses delivered by the mutual fund in this case is 12%. The expense ratio for direct and regular plans is 0.5% and 1.5% respectively. So, the next annual return would be 11.5% for the direct plan and 10.5% for a regular plan, after deducting the expense ratio. Using the compound interest formula, after 5 years, the direct plan would grow to approximately ₹1,72,335, while the regular plan would grow to approximately ₹1,64,745. The direct plan offers significantly higher returns due to the lower expense ratio.

Conclusion

Understanding the difference between direct and regular plans in mutual funds is crucial for optimizing your investment strategy. Direct mutual funds are cost-effective and suitable for knowledgeable investors, while regular mutual funds provide the advantage of professional advice and are ideal for beginners who prefer guided investment. Rupeezy offers the best direct mutual fund plans for investment without any extra cost or hidden charges. It provides a safe, secure and extensive platform for a better trading experience.

Whichever option you choose, it’s important to consider your financial goals, investment knowledge, and the level of support you need. Always remember to review the expense ratios and potential returns before making your decision. By making an informed choice, you can maximize your investment returns and work towards achieving your financial objectives.