For mutual funds, the investors are allowed the freedom to choose between two different schemes: Direct Plan and Regular Plan. Although there are many similarities between the Direct Plan and the Regular Plan and both involve investing in the same mutual fund scheme having the same investment objective, the main difference is in terms of the mode of purchasing, the expenses incurred and the involvement of an intermediary. The choice of direct and regular mutual funds may affect the expenses associated with the investment and the return on investment of the investor and should be considered while choosing a proper plan.

What Is A Direct Mutual Fund?

Direct Mutual Fund Scheme is one of those investment products in which the units of mutual fund are purchased by the investors directly from the Asset Management Company (AMC) without the involvement of an intermediary (distributor) earning commissions through such investment. Thus, the expense ratio for direct plans would be lower than that for the regular plans due to the absence of distribution commissions. Direct mutual fund plans can be bought online via the official website of the Asset Management Company or other platforms offering direct plans.

Main features of Direct Mutual Funds:

• There is no commission for the distributors in the expense ratio of the plan.
• Usually have a low expense ratio as compared to the regular plan.
• Investors make the investment decisions themselves.
• These are suitable for those investors who can research and manage their mutual fund investments independently.

What Are Regular Mutual Funds?

Regular Mutual Fund Plan is an investment scheme whereby the investors buy the units of mutual funds with the help of the distributor/broker. The distributor guides the investor about the schemes available and assists him in making the investment process smooth for him. In exchange for the guidance provided by the distributor, the Asset Management Company pays a commission to the distributor, which is added to the expense ratio of the regular plan.

Features of regular mutual funds:

• Investment is done through an intermediary.
• The intermediary earns a commission from the expense structure of the plan.
• Investors can get help in choosing schemes as well as in investment procedures.
• Ideal for investors who seek guidance during the process of investment.

Direct Mutual Fund Schemes vs Regular Mutual Fund Schemes

Despite the fact that both the plans invest in the same mutual fund scheme, there are certain differences that must be known by investors.

How Does the Expense Ratio Impact Returns?

Expense ratio is one of the main factors which differentiates a direct mutual fund plan from regular mutual fund plan. The expense ratio refers to the annual cost of a mutual fund scheme expressed in terms of the percentage of its assets. This cost is deducted from the assets of the mutual fund scheme and reflected in its net asset value. As distributor commission is included in regular plans, the expense ratios of regular plans are higher than that of direct plans. This difference of even a small percentage point may impact the investment return over a period of time as expenses are deducted from the returns.

Example: How Expense Ratio Impacts Mutual Fund Returns?

Let us suppose that an investor makes an investment of ₹1,00,000 in a mutual fund scheme through direct and regular plans. To make our calculation easy, we shall assume that the mutual fund scheme earns a gross annual return of 12%.

• Direct plan expense ratio: 0.5%
• Regular plan expense ratio: 1%

The approximate annual returns after expenses would be:

Assuming that these two plans operate under the above-mentioned simplifications, the direct plan costs 0.5 percentage points per annum cheaper than the conventional one. While at first glance this difference seems insignificant, in reality, its significance increases with time thanks to compound interest. Real returns on investment and expense ratios can vary and the provided example doesn’t take into account any tax expenses or any other costs.

Advantages and Disadvantages of Direct Mutual Fund Plans

Advantages:

• Low expense ratio in comparison with regular plan.
• No commission is paid by the distributor.
• Potential for higher net returns in the long run all things considered.
• Higher level of control over investment portfolio and its management.

Disadvantages:

• The investors will have to conduct research on their own.
• Need for knowledge regarding investment goals, risk tolerance and asset allocation.
• Responsibility for portfolio monitoring.
• Not appropriate for people seeking personal advice.

Advantages and Disadvantages of Regular Mutual Fund Schemes

Advantages:

• The availability of assistance through mutual fund distributors.
• Assisting new investors in learning about the process of investing in mutual funds.
• Assistance by the distributor could prove beneficial when choosing schemes and doing investment-related paperwork.
• Beneficial for investors who seek help rather than handling everything on their own.

Disadvantages:

• Have higher expense ratios compared to the respective direct plan.
• Commissions to the distributor make the investment more expensive.
• Higher costs may affect net gains.
• Investor should be aware of the services provided by the distributor.

Which is Better: Direct or Regular Mutual Funds?

There isn’t a single solution that fits everyone. The decision between direct and regular mutual funds depends on the investor’s knowledge about investment, his financial goals and whether he wants professional help or not.

Investors who are interested in direct mutual funds are:

• Those who have knowledge about mutual funds.
• Investors who can analyze different mutual fund schemes on the basis of their investment objectives and performance.
• Those who do not mind taking care of their investments independently.
• Those who want to minimize the cost of investment.

Investors who are interested in regular mutual funds are:

• New investors who are just getting started with their mutual fund investment.
• Investors who want help while selecting mutual fund schemes.
• Investors who need help in other investment related issues.
• Investors who do not mind paying high expense ratio for distribution service.

Both the options should be evaluated based on the quality of the guidance provided, the costs and the investors’ capacity to manage their investments.

Can One Move From Regular Mutual Fund To Direct Mutual Fund?

Yes, an investor can move from the regular plan to the direct plan for the same mutual fund scheme as per the process and scheme availability. Normally, moving from one plan to another is seen as redemption of the current plan and investing in the new plan. This implies that an investor needs to consider the following:

• Capital gain tax: Moving from one plan to another will mean a sale of the old plan and hence, capital gain tax might be due.
• Exit load: Exit load will be charged if the units are redeemed within the specified period for the scheme.
• Investment date: It will mean a new investment with a new investment period for taxation purposes.

Before switching, review the applicable charges, tax implications and investment requirements. Consider consulting a qualified tax professional if you are unsure about the consequences.

Choose a Mutual Fund Plan That Suits Your Investment Needs

Differences between direct and regular mutual funds are limited to the channel through which they distribute, expense ratio and the amount of help that is available to the investor. While the former is relatively cheaper, the latter offers distributor assistance. Selection of the proper plan will depend upon how comfortable you are with researching, selecting and managing mutual fund investments. You should not make selection based purely on cheaper rates or convenience. An informed investment decision starts with comprehending cost, risk and features of various available options. Select a suitable mutual fund plan.

Take a more informed approach to investing with Aetram. Explore market insights, screeners, watchlists and alerts to support your investment research.

Frequently Asked Questions (FAQs)

1. Do direct and regular mutual funds invest in the same stocks?
Yes. Direct and regular plans of the same mutual fund scheme invest in the same underlying portfolio and follow the same investment objective. Their expense ratios and NAVs differ.

2. Why do direct mutual funds generally offer higher returns?
Direct plans generally have lower expense ratios because they do not include distributor commissions. Lower expenses can result in higher net returns over time, assuming the underlying portfolio performance is the same.

3. Are direct mutual funds riskier than regular mutual funds?
No. Direct and regular plans of the same scheme carry the same underlying investment risks. The main difference is the distribution route and expense ratio, not the risk of the portfolio.

4. Can beginners invest in direct mutual funds?
Yes. Beginners can invest in direct plans, but they should understand the scheme’s objective, risk level, costs and suitability before investing. Those who need assistance may consider seeking guidance from a qualified financial professional.

5. Can I invest in both direct and regular mutual funds?
Yes. Investors can hold direct and regular plans, including plans from different schemes, subject to the applicable investment requirements. However, it is important to track the overall portfolio and avoid unnecessary duplication. 

Disclaimer: This article is for educational purposes only and is not financial, investment or legal advice. Mutual fund investments are subject to market risks read all scheme related documents carefully. Tax rules are subject to change. Aetram Trades Pvt. Ltd. Is a SEBI-registered stock broker and an AMFI-registered Mutual Fund Distributor (ARN-281894).