Comparison of Direct VS Regular Mutual Funds

Comparison of Direct VS Regular Mutual Funds

When it comes to mutual funds, there are two different major plans; direct and regular plans. If an investor is looking to compare direct vs. regular mutual funds, there are three primary differences – Net Asset Value (NAV), expense ratio and returns.
Investors should have a clear understanding of how both these plans work when it comes to cost and how it will affect their returns.
They must make an informed decision between direct mutual funds and regular funds while investing.
This article will help you compare direct vs. regular mutual funds that will help the investor understand and make a proper decision.

The word “Direct” in the name of mutual funds indicates about funds that are directly offered by the fund houses or AMC without any involvement of third-party agents such as distributors or brokers.
The brokers and agents are not involved in direct mutual funds; hence, there are no brokerages or commissions.
Therefore due to no commission fee, the expense ratio direct plan is lower than the regular plan, but the return is higher due to the low expense ratio.
Any investor who wants to buy a direct mutual fund plan can buy through either online or offline mode.

Regular mutual funds plans are those plans that are purchased or sold via intermediaries that work as the middle between the investor and AMC. Several distributors, brokers charge brokerage fees or commission to provide regular mutual fund plans.
The expense ratio of regular mutual funds is higher than direct mutual funds. Therefore, for those investors who don’t have sufficient knowledge about monitoring their portfolio nor about the market, a regular plan is the right choice for them.
A regular plan is more suitable and convenient for all investors who are not well-versed with the market because they receive advice from several experts at a standard fee.

Security Board Exchange of India (SEBI) introduced the direct plan in 2012 to allow investors to buy without any involvement of any intermediaries.
However, the mutual fund manager keeps a check and manages both the direct and regular mutual funds.
The only major difference between both these funds is in a direct plan; there is no commission or distribution fee involved, while in a regular plan, the intermediaries pay brokerage of commission as a distribution fee.
There are three aspects through which an investor can easily differentiate between a direct plan and a regular plan.

  • Expense Ratio is lower in Direct Plans
  • The proportion of daily net assets of mutual funds used primarily to meet their yearly operating costs is called the expense ratio.
    The annual operating cost has several costs involved, such as commissions, advertising costs, and fund management paid to the distributors or the agents.
    The fund houses do not have to pay any commission to the agent or distributors for selling direct plans because the operating cost of direct plans are lower than regular plans.
    In simple words, the operating expense of direct plans is 1% less compared to regular plans, which translated to a lower expense ratio of direct plans.

  • Returns
  • The lower expense ratio of direct plans generates higher returns. It is because there is the involvement of commission to be paid by the investor to the bank.
    Hence, the lower expense ratio develops a significant and positive impact on the portfolio, and the returns keep compounding.
    However, the direct plan can make a huge difference in an investor's returns while buying a regular vs. direct plan.
    The total difference between a regular plan and a direct plan plays a major role in compounding profit as it can go up to 25 percent in 15 years that can impact the investor's total corpus.

  • Net Asset Value (NAV)
  • The net asset value of direct plans is always higher than regular plans because direct plans generate higher returns than regular plans.
    As the operating expense of the fund is mitigated from its net Assets Under Management (AUM), the lower expense ratio of direct plans delivers higher net asset value.
    Moreover, the difference in NAV gets broader as the power of compounding comes into effect.

  • What do you mean by Direct Mutual Funds?
  • The word “Direct” in the name of mutual funds indicates about funds that are directly offered by the fund houses or AMC without any involvement of third-party agents such as distributors or brokers.

  • What do you mean by Regular Mutual Funds?
  • Regular mutual funds plans are those plans that are purchased or sold via intermediaries that work as the middle between the investor and AMC. Several distributors, brokers charge brokerage fees or commission to provide regular mutual fund plans

  • What is the major difference between a direct and regular mutual funds plan?
  • The only major difference between both these funds is in a direct plan; there is no commission or distribution fee involved, while in a regular plan, the intermediaries pay brokerage of commission as a distribution fee.

  • Does lower expense ratio generates higher returns in direct plan?
  • Yes, the lower expense ratio of direct plans generates higher returns. It is because there is the involvement of commission to be paid by the investor to the bank.
    Hence, the lower expense ratio develops a significant and positive impact on the portfolio, and the returns keep compounding.

Final Thoughts

The comparison of regular vs. direct mutual funds will help the investor to make a wise investment decision. A direct mutual fund is better for a savvy investor who has good knowledge of the market and expertise in the mutual fund.
It's because paying additional money to the advisor isn't worth it. So while several investors opt for financial advisors to seek advice and invest in the best mutual funds, they go for a regular plan.
The fund manager manages both plans, so it's advised to conduct thorough research and talk with a financial advisor beAfore investing in any of these two mutual funds.