Direct vs Regular Mutual Funds: Which One to Choose?

Regarding different investment options, mutual funds are one of the popular ways investors choose. Mutual funds are basically of two types: direct mutual funds and regular mutual funds. Although both types serve the purpose of pooling money from investors to invest in different securities, they differ significantly in cost, accessibility and structure.

In this blog, we will discover the difference these two funds make in terms of investment returns.

What is a Direct Mutual Fund?

In direct mutual fund investment plans, brokers or intermediaries are not involved between the Asset Management Company (AMC) and the investor, leading to the absence of annual fee deductions. Consequently, the expense ratio is significantly lower than that of regular mutual fund plans, where the expense ratio is a small percentage of the total invested value.

Investors opting for direct plans can benefit from lower expense ratios on mutual fund schemes. The lower the expense ratio, the higher the potential return.

 What is a Regular Mutual Fund?

In a regular mutual fund investment plan, the AMC manages your money with the help of brokers or middlemen.

These middlemen, like brokers or financial advisors, usually get paid commissions (annual fees) for helping you out, like offering advice. These fees are part of what’s called the expense ratio, which is a measure of how much it costs to run the fund.

Regular mutual funds tend to increase the expense ratio as the investment return increases.

Differences Between Direct and Regular Mutual Fund Plans

This table summarizes the differences between direct and regular mutual fund plans based on Net Asset Value, Returns, and the Role of Financial Advisor.

Which One to Choose: Direct or Regular Mutual Fund?

Direct Mutual Funds is the answer to this question. Let’s break it down with an example to understand why picking direct mutual funds is the right move.

Consider two investors, Antara and Khushi, both deciding to invest in an equity fund with good returns through a monthly SIP of ₹5,000. Antara opts for a regular mutual fund plan, while Khushi chooses a direct one.

After 10 years of investing, Khushi has accumulated a corpus of ₹12.3 lakh, whereas Antara’s corpus amounts to ₹11.6 lakh. There’s a notable difference of around ₹70,000 in Antara’s investment, which is attributed to the expense ratio.

The seemingly small expense ratio escalates over the years, becoming substantial. This ratio is applied as a percentage of the investment value. As time progresses, the commission increases. By the 9th year, the agent’s commission exceeds Antara’s monthly SIP.

In contrast, over the same 10-year period, Khushi’s investment continues to generate better returns. 

In simple terms, direct mutual funds are the better choice for those who want to save on fees, get better returns, and manage their investments independently. Khushi’s experience shows how direct mutual funds can make investing easier and more rewarding in the long run.

How do you Recognize if a Mutual Fund is Regular or Direct?

Determining whether a mutual fund is regular or direct can be clarified by considering the following factors:

Check the Fund’s Name: The name of the mutual fund scheme usually includes the “Direct”/”Dir” or “Regular”/”Reg” keywords, making it easy for investors to distinguish between them.

Consolidated Account Statement (CAS): You can verify whether a mutual fund is regular or direct by examining your Consolidated Account Statement (CAS). Locate the ‘Advisor’ field in your CAS. The ‘Advisor’ field will display ‘ARN’ in a regular plan followed by a numerical value.

Check the Investment Advise: Direct mutual funds do not offer this service, whereas in regular funds you will find this service.

Check the Expense Ratio: The expense ratio of regular plans is always higher than that of direct plans.

Net Asset Value (NAV): Direct plans have higher NAV as compared to regular plans.

By looking for these attributes, you can easily determine whether the mutual fund is direct or regular.

Conclusion

In conclusion, the choice between direct and regular mutual fund plans can significantly impact your investment journey. Direct mutual funds offer the advantage of lower expense ratios, potentially leading to higher returns over time. As illustrated by Khushi’s experience, the difference in returns can be substantial, emphasizing the importance of minimizing fees. 

We have also seen that recognizing whether a mutual fund is direct or regular is crucial, and investors can use various indicators such as the fund name, Consolidated Account Statement (CAS), investment advice availability, expense ratio, and Net Asset Value (NAV) to make informed decisions. 

Ultimately, opting for direct mutual funds empowers investors to save on fees, achieve better returns, and maintain greater control over their investments, fostering long-term financial growth and stability.

 FAQs

1. Can I switch from a regular to a direct mutual fund plan?

Ans. Yes, you can switch from a regular to a direct mutual fund plan. However, consider factors such as the exit Load, lock-in period, and taxation on your capital gains.

2. What is the tax on switching mutual funds from regular to direct?

Ans. Switching from a regular mutual fund plan to a direct one is considered like selling your investment in the regular plan and then buying into the direct plan. So, if you’ve made any profits (gains) when selling the regular plan, you might have to pay taxes on those gains. The amount of tax you’ll pay depends on how long you hold the investment and whether the gains are short-term or long-term.

3. What is the disadvantage of direct mutual funds?

Ans. One significant drawback of direct mutual funds is that investors must possess prior knowledge of mutual funds. Unlike regular plans, direct plans don’t include services like investment advisors. 

4. Why do direct funds have higher NAVs?

Ans. Direct funds don’t include fees for consulting a finance person, so your investment grows without any deductions, hence making the expense ratio a little lesser. As a result, direct investments usually have higher values than regular plans.

5. Does high or low NAV matter in mutual funds?

Ans. The Net Asset Value, whether high or low, doesn’t inherently impact their quality or potential. NAV represents the per-unit value of the fund and doesn’t determine its performance. Focus on the fund’s health, past performance, fees, and alignment with your goals rather than solely on its NAV.