Subscribe for real-time financial insights on Trade Target’s WhatsApp Channels
When you invest in mutual funds, you’ll notice that every scheme is available in two formats, Direct Mutual Funds and Regular Mutual Funds. Both versions invest in the same portfolio, but the way you buy them and the cost you pay can be very different.
The major difference lies in the expense ratio. Regular mutual funds include distributor commissions, which makes their expense ratio higher. Direct mutual funds, are purchased without intermediaries, so they come with lower costs. Over time, even a small difference in expenses can impact your long-term returns.
Understanding the difference between direct and regular mutual funds is important for every investor, whether you’re just starting out or looking to optimise your portfolio. In this blog we’ll breaks down how each option works, their benefits, and how choosing the right mutual funds can help you build wealth more efficiently.
Regular mutual funds are bought through intermediaries like brokers, financial advisors or distributors. These intermediaries provide services such as investment advice, portfolio evaluation and assistance with transactions.
In return, the fund house pays these intermediaries a commission or fee which slightly increases the expense ratio of regular mutual funds compared to direct mutual funds. This commission affects the investor’s overall returns since the fund house passes on these charges to the investor reducing their overall gains.
However, intermediaries play an essential role in educating investors about mutual funds and guiding them through the investment process. Regular mutual funds have higher expense ratios because a portion of this fee goes to the broker or distributor as a commission. These plans are ideal for investors who need ongoing support and advice from a financial advisor.
Direct mutual funds are investment options that you can buy directly from the fund house or AMC without going through middlemen like brokers or advisors. Because there are no commissions or extra fees for third parties these funds usually have lower costs and can give you better returns. The fee you pay for fund management called the expense ratio is lower for direct plans. You can invest in these funds by going to the fund house’s website or office.
You can also buy direct plans through SEBI registered investment advisors or RIAs.
What is the Differences Between Direct and Regular Mutual Funds?
Direct and regular plans represent two distinct methods of investing in the same mutual fund. Let’s do direct vs regular mutual fund comparison.
- Net Asset Value: Net asset value or NAV of a mutual fund is impacted by the total expense ratio or TER which is the cost of managing the fund. Regular plans typically have a higher Total Expense Ratio than direct plans. This leads to a lower NAV for regular funds compared to direct funds.
- Returns: When we check return difference between direct and regular mutual funds, direct plans have lower fees because they don't include distributor commissions so you get higher returns. In contrast, regular plans have higher fees which results in lower returns for you.
- Role of Financial Advisor: In direct plans you manage your investments directly with the AMC, making your own decisions without the help of a financial advisor. On the other hand with regular plans a financial advisor guides you through the investment process, helping you choose where and how much to invest based on your goals.
- Risk: Direct plans are riskier because you have to do your own research and make investment decisions on your own. In contrast, regular plans are less risky since financial advisors handle the research and diversify the investments for you.
- Convenience: Direct mutual fund plans are often seen as more convenient because they let you make investment decisions on your own without involving a middleman. However, if you're not familiar with mutual funds or lack financial knowledge, a regular plan with professional guidance might actually be more convenient for you.
- Expert Advice: If you're not familiar with finance and investments you might want to use a mutual fund distributor or MFD. An experienced MFD can help you understand mutual funds better and offer valuable advice.
- Goal Based Planning: When investing through an advisor or MFD they'll usually ask about your financial goals. Based on your goals, risk tolerance and other factors they’ll recommend a mutual fund that suits your needs.
- Regular Monitoring: With direct plans you'll need to keep track of your investments yourself by logging into your account. For regular funds your advisor or MFD will monitor your investments and suggest any necessary adjustments.
- Risk: Direct plans are riskier because you have to do your own research and make investment decisions on your own. In contrast, regular plans are less risky since financial advisors handle the research and diversify the investments for you.
- Convenience: Direct mutual fund plans are often seen as more convenient because they let you make investment decisions on your own without involving a middleman. However, if you're not familiar with mutual funds or lack financial knowledge, a regular plan with professional guidance might actually be more convenient for you.
- Lower Expense Ratio: Direct mutual funds have a lower expense ratio compared to regular mutual funds because they don't involve intermediaries. This means the fund company doesn't need to pay commissions to brokers or advisors.
- Higher NAV: With a lower expense ratio, NAV of the fund is higher. NAV is the price per unit of the fund’s assets. It’s the fund’s total assets divided by the number of units.
- Higher Returns: Investing in direct mutual funds can lead to higher returns because there are no commissions paid to middlemen. It means more of your money goes into the investment itself rather than covering extra fees.
Regular funds are a good choice if you want continuous support and advice from financial advisors. They offer personalized guidance and help you create a goal based investment plan but this comes at a cost. Regular funds have a higher expense ratio because they include commissions and brokerage fees for these services. Although the difference in expense ratios between regular and direct funds may seem small, it can impact your returns over time.
Direct funds are ideal for investors who focus on minimizing costs and maximizing returns. Since they have lower expenses and no commissions or brokerage fees, you can maximize your returns in the long run. Direct funds are particularly attractive to those who are comfortable making investment decisions independently and doing their own research.
How to Identify Whether a Mutual Fund is Direct or Regular?
When choosing between direct and regular mutual fund options can be tricky.
Here are some ways to distinguish them:
- Fund Name: Check the name of the fund. Regular funds have Regular or Reg in their name whereas direct funds include Direct or Dir in their name.
- Expense Ratio: Check the fund's expense ratio. Regular funds generally have a higher expense ratio than direct funds.
- Net Asset Value: Compare the NAVs of the funds. Direct plans generally have a higher NAV compared to regular plans.
- Consolidated Account Statement: Review your CAS. For regular plans you will see an Advisor field followed by a number. If it’s a direct plan this field will either be blank or not display the ARN.
These indicators should help you identify whether a fund is a regular or direct plan and make a more informed investment choice.
Key factors to evaluate when investing in mutual funds
When investing in mutual funds here are some key factors to consider:
- 1. Investment Goals: Decide what you want to achieve with your investment. Are you looking for growth, regular income or both? Your goals will guide you in choosing the right fund.
- 2. Risk Tolerance: Understand how much risk you’re comfortable with. Different funds have different levels of risk so choose one that fits your comfort level.
- 3. Fund Type: Mutual funds come in different types like equity, debt or a mix. Pick a type that aligns with your goals and risk tolerance. Also decide if you want a fund managed actively or one that tracks an index passively.
- 4. Past Performance: Look at how the fund has performed in the past. While it doesn’t guarantee future results it can give you an idea of how the fund has fared in different market conditions.
- 5. Fees: Check the fund’s expense ratio which shows how much you'll pay in fees. Lower fees are better for your returns especially over the long term.
- 6. Fund Manager: Check the fund manager's background and track record. A skilled manager can make a big difference in the fund’s performance.
- 7. Portfolio: Look at what the fund invests in. A diversified portfolio can help mitigate risk. Make sure the investments fit with your goals.
- 8. Exit Fees and Taxes: Be aware of any fees for withdrawing your money early or exit load and the tax implications of investing in different types of funds.
- 9. Investment Duration: Think about how long you plan to keep your money invested. Some funds are better for short term investments while others are suited for the long haul.
- 10. Systematic Investment Plan: Consider investing through SIPs which allow you to invest a fixed amount regularly. It can help you reduce the impact of daily market fluctuations.
- 11. Transparency: Opt for funds that offer transparent details about their performance, fees and holdings. Being informed is important for making smart investment decisions.
Final Words
By now, you should have a better understanding of difference between direct mutual funds Vs regular mutual funds. Direct funds have no commission fees which can help you boost your investment returns. However, if you’re not very familiar with mutual funds it might be worth considering a regular plan through an intermediary who can provide guidance and support.
Frequently Asked Questions on Direct vs Regular Mutual Funds
Which is better regular or direct mutual fund?
Direct funds are often a better choice because they have lower fees which can lead to higher returns on your investment.
Why regular funds are better than direct funds?
Regular funds come with advice from a financial advisor which can be helpful if you're new to investing. Direct funds, on the other hand don’t offer this kind of guidance. If you’re less experienced support from an advisor with a regular fund might be a better option for you.
Can I change from regular to direct plans?
Yes, you can switch from a regular mutual fund plan to a direct plan at any time by requesting it from the fund company. However, this process is treated like a regular redemption or switch.
If you switch to a direct plan before the end of the exit load period you might incur an exit load fee. If you switch after this period there won’t be any exit load charges.
Keep in mind switching plans may have tax implications. If you switch within the short term capital gains period that is 1 year for equity funds and 3 years for nonequity funds you’ll need to pay short term capital gains tax. If you switch after this period you'll pay longterm capital gains tax instead.
How to Find Out if I Have Invested in a Direct or Regular Plan?
To find out if you’ve invested in a Direct or Regular Plan check your mutual fund statement or log into your fund's online portal. Also, you can contact your mutual fund company or advisor to confirm.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
