Direct vs Regular Mutual Funds: What’s the Difference?
Mutual funds have emerged as a preferred investment avenue, capturing the attention of both salaried individuals and the self-employed. These financial instruments offer the potential for higher returns compared to traditional favourites like fixed deposits. Their performance has shone brightly in recent years, thanks to tax benefits and increased liquidity. So, if you’re contemplating mutual fund investments, you have two paths to explore: direct mutual funds and regular mutual funds. This article will explore the differences between direct and regular funds and their similarities to help investors determine which option is the best for them.
What is a Direct Mutual Fund?
Direct mutual funds are offered directly by the Asset Management Company (AMC) or fund houses without the involvement of third-party agents, such as brokers or distributors. This absence of intermediaries means no commissions or brokerage fees, resulting in a lower expense ratio for direct mutual funds. Consequently, investors enjoy higher returns due to these reduced expenses. Identifying a direct mutual fund is straightforward: their names are prefixed with ‘Direct.’ You can purchase these funds through online or offline channels.
Additionally, you can invest in direct plans through SEBI Registered Investment Advisors (RIAs), who charge fees for their advisory services. As Direct Plan investments bypass mutual fund distributors, the AMC saves on distribution expenses, including distributor commissions. Consequently, when comparing regular vs. direct mutual funds, you’ll notice that the Total Expense Ratios (TERs) of direct plans are lower.
What are Regular Mutual Funds?
Regular mutual funds are purchased through third-party agents like mutual fund distributors who charge fees to the fund house for selling their mutual funds. This fee is typically recovered by the Asset Management Companies (AMCs) through a slightly higher expense ratio, resulting in lower returns compared to direct mutual funds. Regular mutual funds are suitable for investors new to mutual funds or those lacking market knowledge and time for portfolio monitoring, as they can access expert advice for a nominal fee.
In contrast, direct mutual funds do not involve commissions, making them a cost-effective choice. Beginners may prefer regular mutual funds since they offer expert guidance despite the slightly higher costs. Your financial adviser conducts research on your behalf in a regular plan to assist with decision-making.
Introduced in 2012 by SEBI, direct plans in mutual funds allow investors to purchase funds without intermediaries. Both direct and regular plans are managed by the same mutual fund manager and invest in the same assets. The primary distinction is that regular plans involve commission fees paid by the fund house, while direct plans do not.
Total Expense Ratio
The mutual fund company charges investors a fee called the total expense ratio (TER) to cover recurring operating expenses. TER is proportionally deducted from the scheme’s assets and reflected in the unit’s price or Net Asset Value (NAV). It encompasses management fees, registrar’s fees, trustee fees, marketing, and distribution costs.
Distribution costs represent commissions paid to mutual fund distributors or financial advisors who act as intermediaries between the asset management company (AMC) and investors. TER is a critical factor for comparing direct and regular plans.
Direct vs Regular Mutual Funds: The Difference Between Direct and Regular Mutual Funds
The following table demonstrates the various aspects of differences between Regular Mutual Funds and Direct Mutual Funds. While considering Regular vs Direct Mutual Funds, these aspects come in handy:
| Aspects of Difference | Regular Plans | Direct Plans |
| Returns | TER difference can range from 0.5% to 1%. | TER difference typically lower, impacting returns less. |
| Net Asset Value (NAV) | Regular plan NAVs are lower due to higher TER. | Direct plan NAVs are higher due to lower TER. |
| Role of Financial Advisor | Suited for investors seeking financial advice. | Ideal for DIY investors; no need for financial advisors. |
| Expense Ratio (TER) | Higher due to commissions and distribution costs. | Lower as no commissions or distribution costs involved. |
| Market Research | Financial advisors conduct market research for the investors. | Investors do their own market research. |
| Distribution Channels | Sold through intermediaries like brokers, distributors, and financial advisors. | Directly offered by the AMC without intermediaries. |
| Ideal for | Investors seeking advice and guidance from intermediaries. | DIY (Do-It-Yourself) investors comfortable with self-management. |
| Third Party | Present | Not Present |
| Convenience | May involve paperwork and intermediaries. | Generally offers more convenient and direct transactions. |
| Transparency | May be perceived as lower due to higher costs. | Generally higher transparency. |
Similarities Between Regular and Direct Mutual Funds
While it’s easy to get caught up in the debate of Regular vs Direct Mutual Funds, it’s essential to acknowledge that they share some similarities, as well. These similarities include:
- Same Investment Portfolio: Both regular and direct plans of a mutual fund invest in the same underlying securities, such as stocks, bonds, or a combination of various asset classes. This means that the performance of the fund is tied to the performance of these underlying assets.
- Market Risk Exposure: Investors in both regular and direct plans are exposed to market risks. Changes in the financial markets can impact the value of the mutual fund units, leading to potential gains or losses for investors.
- Redemption Options: Investors in both regular and direct mutual funds can typically redeem their investments when needed, subject to the fund’s exit load and exit process. This provides liquidity and flexibility to investors.
- Tax Treatment: The tax treatment for both regular and direct plans is the same. Depending on the type of mutual fund and the holding period, investors may be subject to capital gains tax on their returns. Tax implications are independent of whether the investment is in a regular or direct plan.
- Regulatory Oversight: Both types of mutual funds are regulated by the Securities and Exchange Board of India (SEBI) and must adhere to the regulatory guidelines and disclosures mandated by SEBI. This ensures a certain level of transparency and investor protection.
- Systematic Investment Plans (SIPs): Investors can set up SIPs in both regular and direct plans, allowing them to invest fixed amounts at regular intervals. SIPs help in disciplined and systematic investing, regardless of the plan type.
It’s important to remember that the choice between regular and direct plans depends on individual investor preferences, goals, and knowledge. Evaluating the differences and similarities between these plans can help investors make informed decisions that align with their financial objectives and risk tolerance.
How Can You Distinguish Between Regular vs Direct Mutual Funds?
Knowing the type of mutual fund plan you’re investing in is crucial. There’s a common misconception that if you invest through the AMC, you’ll get a direct fund. However, AMCs, brokers, intermediaries, and investment platforms all offer both types of schemes. Identifying them is simple:
- Scheme Name: Direct plans include the words ‘Direct’ or ‘Dir’ in their names, while regular plans contain ‘Regular’ or ‘Reg.’
- Expense Ratio: Regular plans typically have a higher expense ratio compared to direct plans.
- CAS (Consolidated Account Statement): Check your CAS for an ‘Advisor’ field. If it’s a regular plan, you’ll see ‘ARN’ followed by a number in the ‘Advisor’ field.
- Commissions: Regular plans involve commissions paid to intermediaries, while direct plans do not.
- NAV: NAVs of direct plans are generally higher due to lower expenses.
- Returns: The return difference between Direct and Regular Mutual Funds make them distinguishable, as well. Lower expenses in direct plans may lead to slightly higher returns.
Understanding these differences will help you make an informed choice when investing in mutual funds.
What Are the Advantages of Regular Plans Compared to Direct Plans in Mutual Funds?
Investing in mutual funds is a crucial financial decision, and choosing between Regular Plans and Direct Plans is an important step. Each option has its unique benefits, and understanding these can help you make an informed choice. While Direct Plans often attract investors due to their lower expense ratios and potentially higher returns, Regular Plans provide significant advantages for those who value professional guidance and support.
Expert Guidance
Regular Plans include the services of financial intermediaries, such as advisors or distributors, who can guide investors in selecting mutual funds that align with their financial goals and risk tolerance. This personalised advice is particularly beneficial for individuals who may lack the knowledge or confidence to navigate the complexities of mutual fund investments independently.
Convenient Investment Process
Investing in mutual funds involves analysing options, understanding risk, and choosing the right funds. With Regular Plans, intermediaries handle much of this process, simplifying the investment journey for investors. This convenience is especially valuable for those with limited time or experience in financial markets.
Active Portfolio Monitoring
Financial markets are dynamic, requiring ongoing attention to ensure investments remain aligned with goals. In Regular Plans, intermediaries actively monitor market trends and review clients’ portfolios, recommending adjustments when necessary to optimise returns and manage risks. Investors in Direct Plans, however, bear the full responsibility of monitoring and managing their portfolios.
Additional Support Services
Regular Plans often include additional support services provided by intermediaries, such as assistance with investment documentation, tax-related paperwork, seamless redemption processes, and customised investment insights. These services can make the overall investment experience more comprehensive and less burdensome.
While Regular Plans offer these benefits, it’s important to note that they come with higher expense ratios due to distributor commissions. Over time, this cost difference can lead to slightly lower returns compared to Direct Plans. Direct Plans are more cost-efficient but require investors to take on greater responsibility for fund selection, portfolio management, and investment tracking.
Direct vs Regular Mutual Funds: Which one is the investor’s choice?
We’ve been engaging in the debate of ‘Direct Mutual Fund vs Regular Mutual Fund’ for some time now. Still, it is essential to understand that direct and regular plans are two variations of a single mutual fund strategy managed by the same fund manager and investing in the same assets. The key distinction is that direct funds do not charge a commission, while regular funds do, in the form of transaction fees or distribution costs to brokers. This cost-saving feature results in lower expenses and a lower expense ratio for direct plans.
Direct plans typically have a higher Net Asset Value (NAV) compared to regular plans. However, choosing between the two shouldn’t solely rely on NAV. Consider your investment knowledge and ability to manage your portfolio. For those lacking expertise, regular plans offer professional guidance with continuous portfolio monitoring and optimization, potentially leading to better returns despite higher fees.
Ultimately, the choice between direct and regular mutual funds depends on your level of experience and your preference for convenience. Experienced investors may opt for direct plans, while newcomers often find security, value-added services, and portfolio management offered by regular mutual funds more suitable, even with a convenience fee involved.
To Wrap It Up…
In summary, choosing between direct and regular mutual funds isn’t a ‘one-size-fits-all’ type of situation. Both options offer distinct advantages, catering to investors with varying preferences and experience levels. Direct plans provide cost-efficient solutions, ideal for savvy investors capable of independent portfolio management. In contrast, regular plans offer valuable professional guidance, convenience, and comprehensive services. The optimal choice hinges on your financial goals, risk appetite, and investment expertise.
Frequently Asked Questions About Direct and Regular Mutual Funds
Direct funds are suitable if the investor has an in-depth understanding of the financial market and the time to manage investments. Conversely, regular funds are a better choice if an investor seeks expert advice and prefers well-researched funds.
When regular and direct mutual funds are pitted against each other, Direct funds stand out because they don’t require investors to pay any commissions. Conversely, with regular funds, the fund house factors in advisory charges within the expense ratio. If you’re a financially savvy investor deeply interested in the market, direct funds could be the ideal fit for your investment needs.
Transitioning from regular to direct mutual funds is a straightforward process. To initiate the switch, utilize your investment account. After logging in, navigate to the fund investment page, and opt for the ‘Switch’ plans feature. Submit your request online through your account with your investment manager or broker. Typically, it takes up to 5 business days to process your request. Alternatively, you can visit the AMC branch and complete an offline form, though this method may be more time-consuming and inconvenient. If you prefer a non-online approach, the offline option is available.
Investors seeking direct engagement with fund houses instead of intermediaries can opt for direct plans. These plans are ideal for those with the capacity and knowledge to conduct their own research on mutual funds. Investors must manage the entire process, including application, documentation, portfolio tracking, compliance, and more.
The monthly factsheets of each mutual fund scheme reveal the TERs for both regular and direct plans. You can access these factsheets by downloading them from the AMC websites.
