Direct vs Regular Mutual Fund: What’s the difference?

There are two primary routes to invest in mutual funds: direct and regular. The first involves investing directly through the asset management company or mutual fund house whose scheme you are investing in. Meanwhile, the regular option involves investing through an intermediary, such as a registered distributor.

The key differences between regular and direct mutual fund plans revolve around how you purchase the funds and the expense ratio you pay to the asset management company for managing the scheme.

Understanding these differences is essential, as it can influence investment decisions as well as outcomes. This article tells you more about direct vs regular mutual funds and guides you in determining which may be more suitable for you.

• Table of contents

1. What is a mutual fund?
2. What is a regular mutual fund plan?
3. What is a direct mutual fund plan?
4. What are the benefits of regular mutual funds?
5. What are the benefits of direct mutual funds?
6. Differences between direct and regular mutual fund plans
7. Direct vs regular mutual fund investing: Which is better?
8. How to recognize if a mutual fund is regular or direct?

What is a mutual fund?

To begin with, let’s understand what a mutual fund is. A mutual fund is an investment vehicle that pools money from multiple investors and invests it in a diversified basket of assets that could include stocks, bonds, and other securities. Investors make money if the value of the securities in the portfolio rises.

What is a regular mutual fund plan?

Regular mutual fund plans are those purchased through an intermediary, such as a registered mutual fund distributor. These intermediaries may help investors in scheme selection, making investment application and monitoring the investments.

However, these services come at a cost. Regular plans typically have a higher total expense ratio (TER) than direct plans. This is because a portion of the expense ratio is used to compensate the distributor or broker in the form of a commission.

These commissions are paid as long as you remain invested in the regular mutual fund plan. In essence, you are indirectly paying for the intermediary's services through a slightly higher cost structure.

To legally distribute mutual funds, intermediaries must possess an ARN (AMFI Registration Number), which authorises them to operate in this capacity. This ensures that investors are dealing with qualified professionals who adhere to regulatory guidelines.

What is a direct mutual fund plan?

With direct plans, you bypass intermediaries and invest directly with asset management company (AMC) that manages the mutual fund. This eliminates the need for broker commissions, leading to a lower expense ratio compared to regular plans.

There are also a few online aggregator platforms that facilitate this process by offering a way to invest in direct mutual fund schemes with zero brokerage and commission fees.

By removing the intermediary, direct mutual funds offer the benefit of lower costs, which in turn optimises return potential. However, investing through the direct route requires independent financial planning, requiring detailed investment research and active decision-making.

What are the benefits of regular mutual funds?

• Professional assistance:Regular mutual funds are managed by intermediaries, providing guidance for investment decisions.
• Convenience:Investors benefit from the expertise and support of advisors in choosing a mutual fund, making them suitable for beginners.
• Portfolio diversification:Advisors help build a diversified portfolio tailored to your risk profile and financial goals.
• Ongoing monitoring:Regular funds typically offer portfolio reviews and adjustments, ensuring the investment stays aligned with your goals.
• Ease of access:Investors can easily invest in mutual funds through distributors or financial advisors without needing detailed market knowledge.
• Access to new investors:For those new to investing, regular mutual funds offer a more hands-off approach with an advisor’s guidance.

What are the benefits of direct mutual funds?

• Lower costs:Direct mutual funds may have lower expense ratios because there are no intermediary fees.
• Full control:Investors make their own investment decisions and manage their portfolios directly, allowing greater control over their investments.
• Transparency:Direct mutual funds offer clear insights making it easier to track your investment.
• No intermediary:Since you invest directly with the fund house, there are no third-party commissions, which can save costs.
• Suitable for experienced investors:Direct funds can be suitable for those who are willing to learn about investment strategies without relying on a financial advisor.

Differences between direct and regular mutual fund plans

The distinction between direct and regular mutual fund plans boils down to three key factors:

• Net Asset Value (NAV): Fund houses incur expenses for managing the fund, reflected in the total expense ratio or TER. This is charged as a percentage of the Net Asset Value (NAV). The NAV of a mutual fund scheme is calculated based on the market value of the underlying securities, minus any liabilities, divided by the total number of outstanding units. Regular plans typically have a lower NAV due to the higher expense ratio (therefore, higher liabilities). Direct plans, with their lower expense ratios, have a higher NAV. In simple words, the net value of your investment is higher in a direct plan compared to a regular plan of the same fund.
• Returns:The lower expense ratio of direct plans translates into higher returns over time. This is because you aren't indirectly paying for intermediary commissions. Regular plans, due to their higher costs, generally offer slightly lower returns. The Total Expense Ratio difference between regular and direct plans varies across schemes and AMCs, with equity funds generally having higher commissions than some debt funds. The difference between the TERs of direct and regular plans typically range from 0.5% to 1% (approximately), which, in the long-term, can result in a significant difference in real returns.
• Financial guidance:In direct plans, you make independent investment decisions. This requires you to research, select, and invest in schemes based on your individual goals and risk tolerance. There’s no external financial guidance. Regular plans, on the other hand, involve distributors who can guide you through the investment process, helping you choose suitable schemes and investment amounts. Some of these distributors can also be wealth planners, meaning they have financial expertise. They play a significant role in guiding investors through investment decisions, portfolio monitoring, and offering expertise beyond just transactions

Direct vs regular mutual fund investing: Which is better?

The choice between direct and regular mutual funds comes down to your individual needs, financial knowledge, and investment style. Both options offer their own advantages:

Regular funds: Guidance and support

Regular funds are well-suited for investors who value financial and ongoing guidance. If you're new to mutual funds or lack confidence in market analysis, seeking guidance from an intermediary like a mutual fund distributor or investment advisor is recommended. These professionals can offer investment advice, helping you create an investment plan that aligns with your financial goals. Though the expense ratios are higher, it can be beneficial if such guidance results in better financial planning.

Direct funds: Cost efficiency and DIY investing

If you have a strong understanding of mutual funds and are willing to conduct your own research, direct investment can be a viable option. By eliminating commissions and brokerage fees, direct funds allow your investments to grow more efficiently. This helps in cost efficiency and optimising return potential.

Direct investments in mutual funds are also suitable for those who want complete control over their investment decisions, including scheme selection and monitoring. However, selecting the right scheme based on your investment goals and risk appetite is essential. Incorrect scheme selection can result in sub-optimal investment experience.

How to recognize if a mutual fund is regular or direct?

To ensure that you're investing in the plan that aligns with your preferences, you should know how to find whether a mutual fund is a regular or direct plan. Regular funds typically include the term "Regular" or "Reg" in the scheme name, whereas direct funds will have "Direct" or "Dir" as part of the name. When choosing between the two, be sure to check the expense ratios.

Conclusion

Every investor has unique preferences, goals and investing styles. Carefully weigh the pros and cons of direct versus regular plans to determine the best fit for your individual circumstances. It advisable not to be influenced solely by expense ratios. Investing through financial advisors and distributors have several advantages with regard to assistance in scheme selection and financial planning, which may, in the long term, result in an enhanced investment experience if accurate guidance is given.

FAQs

How will I know if I have invested in a direct or regular plan?

Regular funds typically include the term "Regular" or "Reg" in the scheme name, while direct funds have "Direct" or "Dir."

Which is better, direct or regular mutual funds plan?

Neither is inherently better. Regular funds might be better suited for you if you need professional guidance. Financial advisors associated with regular plans can offer personalised advice and support, helping you make informed investment decisions and create a tailored investment plan.

It may also be better suited for those who prefer a hands-off approach. If you're not comfortable with independent research and decision-making, regular plans can provide a convenient way to invest with professional assistance. The mutual fund distributor also helps you through the paperwork or online application process, making it more hassle-free.

Direct mutual funds, on the other hand, can be more suitable for those who have strong knowledge of mutual funds and can independently select schemes after thorough research. Direct investing requires also requires ongoing research and monitoring.

What are the disadvantages of direct plans in mutual funds?

The primary disadvantages of direct mutual funds are:

• Requires independent decision-making: You need to be comfortable with independent research and decision-making, as there's no financial advisor to guide you.
• Requires more time and effort: Monitoring your investments and making adjustments requires more time and effort compared to regular plans.

What are the disadvantages of regular plans in mutual funds?

Regular mutual fund plans come with higher expense ratios due to commission payments to distributors, which can reduce net return potential. There is also the risk of receiving inaccurate advice from distributors.

it good to switch mutual funds from regular to direct?

Switching from regular to direct plans can be beneficial if you:

• Want to reduce costs: Direct plans have lower expense ratios, leading to potentially higher returns over time.
• Are comfortable with DIY investing: If you're confident in your ability to make informed investment decisions, switching to direct plans can be a cost-effective option.

However, before switching, consider factors like exit loads (if applicable) and tax implications. If you're unsure, consult a financial advisor to assess whether switching aligns with your overall investment strategy.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.