Difference Between Direct And Regular Mutual Funds

Direct And Regular Mutual Funds: Over the past few years, there has been a lot of buzz around direct plans when it comes to investing in mutual funds. However, a large number of people don’t understand the difference between a regular and a direct plan and which they should go for. If you have the same questions in your mind, then you are at the right place.

If you’re looking to invest in mutual funds, you’ve probably come across two types: Direct Mutual Funds and Regular Mutual Funds. Both invest in the same portfolio of stocks or bonds, but they differ in terms of cost, returns, and how you buy them. This blog explains the difference between regular and direct mutual fund options, so you can decide which one is right for you.

Primarily, the difference between regular and direct plans of a mutual fund scheme arises from the difference in their cost structure and how these plans are invested.

What is The Difference Between Direct And Regular Mutual Funds?

We will now explain regular mutual funds and direct mutual funds with an example. When you buy a mutual fund you are buying a portfolio of securities that is diversified by pooling money with other investors. How you choose to invest will have an impact on the returns that you receive. Direct and regular mutual funds come into play.

What is a Direct Mutual Fund?

Direct funds are bought directly through the AMC (mutual fund company) and not through a broker. These funds are cheaper and offer slightly higher returns as there is no brokerage commission.

Benefits of Direct Mutual Funds

Direct mutual funds have several benefits:

• Lower Expense Ratio: Direct plans have lower expense ratios as they eliminate the commission paid to intermediaries.  
• Higher Potential Returns: Lower costs directly translate to higher potential returns over the long term.  
• Greater Control: You have more control over your investments and can make informed decisions.  
• DIY Approach: Suitable for investors who are comfortable with self-directed investing and research.

What is a Regular Mutual Fund?

Now let’s understand how regular mutual funds work. Regular mutual funds can be bought via an intermediary such as a broker or financial advisor. Regular funds are slightly more expensive because these intermediaries receive a commission.

Benefits of Regular Mutual Funds

Regular mutual funds offer several advantages for investors, especially those new to investing or who prefer a hands-off approach:  

• Professional Management: Experienced fund managers make investment decisions, reducing the need for extensive market research and analysis.  
• Diversification: Investments are spread across various assets, minimizing risk.  
• Liquidity: Easy to buy and sell units, providing flexibility.
• Convenience: Simplified investment process through financial advisors or online platforms.
• Financial Advice: Access to personalized advice and guidance from financial experts.  
• Regular Updates: Receive regular updates on portfolio performance and market trends.

Key Differences Between Direct and Regular Mutual Funds

Detailed Comparison: Regular vs Direct Mutual Fund

1. Cost and Expense Ratio

A major difference between direct and regular mutual fund options is the expense ratio (management fees).

• Direct funds charge lower fees since no intermediary is involved.
• Regular funds include broker commissions, so their fees are higher.

This difference in cost affects the Net Asset Value (NAV). Over time, direct funds have higher NAVs than regular funds because of lower expenses.

2. Returns

The debate over direct and regular mutual funds is largely driven by the returns. Direct mutual funds have lower fees and offer higher average returns of 1 to 2% per annum. The difference in costs can be significant over time.

3. Advice and Support

• Direct mutual funds are best for experienced investors who can manage their portfolios without needing help.
• Regular mutual funds are ideal for beginners, as brokers or advisors offer advice on selecting and managing investments.

Which is Better: Direct or Regular Mutual Funds?

Regular Mutual Funds

This is ideal for people who need advice and ongoing support from financial advisors. These cost more because of commissions, which can reduce long-term returns.

Direct Mutual Funds

This is best for investors to manage their investments easily. With no advisory fees, these have lower costs, and offer better long-term returns. Choose this if you want to make independent financial decisions.

Which Should You Choose – Regular vs Direct Mutual Fund?

• Direct mutual funds offer higher returns with lower fees if you are confident about managing your investments.
• A regular mutual fund is a good choice if you are new to investing, or if you prefer professional guidance. However, it will cost you more.

There are many factors to consider when choosing between mutual funds and direct investments.

• Investment Knowledge and Time: If you have a good understanding of the market and are willing to invest time in research and fund selection, direct mutual funds may be a more profitable option.
• Risk Tolerance: Direct mutual funds may be more suitable for those who are comfortable taking a higher level of risk and want to maximize returns.
• Financial Discipline: Direct mutual funds require more discipline, as you have to manage your investments independently.

Direct vs regular mutual fund return calculator

Online calculators and financial planning tools can be used to calculate the return difference between regular and direct mutual funds. You can input parameters like:

• Initial Investment Amount: The amount you plan to invest.
• Monthly SIP Amount: If you plan to invest through a Systematic Investment Plan (SIP).
• Expected Annual Return: The anticipated return on your investment.  
• Time: The duration of your investment.
• Expense Ratio Difference: The difference in expense ratios between the direct and regular plans.  

Conclusion: Regular And Direct Mutual Funds

Understanding the differences between mutual funds and direct investments will help you make more informed decisions. Direct funds may be more expensive, but they offer higher returns. Mutual funds that are regularly managed offer valuable advice and can be a good choice for people who need guidance.