Mutual funds have become the most popular investment option for salaried employees and self-employed professionals, offering a practical means of growing wealth. They can potentially deliver higher returns than traditional options, like fixed deposits, by leveraging market-linked investments.
Every mutual fund comes with two options available to investors – 1) Direct Plan, which is an investment directly with an AMC and 2) Regular Plan, which comes through intermediaries. However, many are left wondering which to choose in India’s ₹68,04,913 crore mutual fund market as of November 2024.
In this article, we are going to simplify the differences, benefits, and factors to consider when choosing between direct vs regular mutual funds.
Understanding Direct Mutual Funds
Direct mutual funds are investment schemes bought directly from an Asset Management Company (AMC) without involving any intermediary. Investors can access these funds through the AMC’s website, by visiting their office, or by consulting a SEBI-registered Investment Advisor (RIA).
One of the greatest benefits of direct mutual funds is their lower expense ratio. There are no distributor commissions, which means that the investor saves on additional costs and can potentially get higher returns over time. Such funds are suitable for investors who are comfortable with researching and managing their investments independently or with the help of a trusted RIA.
By cutting out the middlemen, direct mutual funds are more transparent and cost-effective, which is why they are a favourite among informed and self-directed investors.
Understanding Regular Mutual Funds
Regular mutual funds are investments made through intermediaries such as brokers or mutual fund distributors. These intermediaries, registered with an AMFI Registration Number (ARN), are licensed to help investors make mutual fund choices.
A main advantage of regular funds is the advisory assistance offered by intermediaries. They assist investors in understanding different mutual fund schemes and risk appetite assessments and aligning their investments to financial goals. An intermediary supports new entrants into the investment process and people who do not have time for portfolio management.
However, regular mutual funds charge a higher expense ratio since it involves the trial commissions paid to the intermediary as part of the cost. This, though costly, may well be offset by expert advice and the convenience it brings for many investors.
Difference Between Regular and Direct Mutual Funds
Below is an elaborated table showing the difference between direct vs regular mutual funds:
| Points | Direct Mutual Funds | Regular Mutual Funds |
| Expense Ratio | Lower, as no commissions are paid to intermediaries, resulting in cost savings. | Higher, as a part of the cost, includes trail commissions paid to intermediaries like brokers or distributors. |
| Intermediary | Purchased directly from the AMC through their website, app, or office. | Purchased through brokers, distributors, or wealth advisors who receive commissions for their services. |
| Convenience | Investors manage their investments independently via AMC platforms or tools like Torus Digital. | Requires interaction with intermediaries for purchases, changes, or any transactional updates. |
| Returns | Higher returns are due to the lower expense ratio, with differences ranging from 0.5% to 1%. | Comparatively lower returns, as commissions reduce the final returns earned by investors. |
| Net Asset Value (NAV) | Higher NAV, as the lower expense ratio, allows more of the fund’s value to be allocated to investments. | Lower NAV, as the higher expense ratio reduces the portion of the fund value allocated to investments. |
| Risk of Misleading | Minimal risk, as there are no intermediaries whose interests might conflict with those of the investor. | Some risk, as agents might prioritise commissions over the investor’s best interests. |
| Investor Control | Full control, requiring investors to research, compare funds, and manage their portfolios themselves. | Little control over investment decisions and information from the intermediaries; not as direct as it may seem. |
Regular vs Direct Mutual Funds: Which One Should You Choose?
The choice between direct vs regular mutual funds mostly depends on intermediaries and all their associated costs. Here is how you can decide which is better for you:
- Direct Mutual Funds: The investors directly buy fund units from the Asset Management Company (AMC), resulting in a lesser expense ratio without commission fees. This means the returns are higher, especially in the long term. Direct plans attract mainly seasoned investors who are confident about managing their portfolios themselves.
- Regular Mutual Funds: In this case, there are intermediaries like brokers or financial advisors who offer their services, including portfolio management and investment advice. While these plans incur higher expense ratios because of the commissions paid to the intermediaries, investors benefit from professional advice, which is particularly useful for novice investors lacking market knowledge.
The final decision between regular and direct mutual funds depends on the investor’s needs and whether they require professional help. A direct plan provides greater control and a possible saving on fees, whereas a regular plan offers convenience and professional guidance.
Knowing the difference between direct and regular mutual funds will help you make an informed investment decision that suits your financial goals.
Final Thoughts
By now, you should have a clear understanding of the differences between direct vs. regular mutual funds. Direct funds, with no commissions, offer cost savings and higher returns, making them ideal for experienced investors. However, if you are new or lack expertise, investing in regular plans with intermediary support can be a better choice.
Keep in mind that investing in mutual funds carries risks from low to high. Staying informed, monitoring market trends, and reviewing your portfolio regularly is key to achieving your financial goals.
