Direct vs Regular Mutual Funds

Direct vs Regular Mutual Funds

The main difference between direct and regular mutual funds is that in direct mutual funds, there is no distributor or third-party involvement to complete the transaction. On the other hand, in a regular mutual fund, there is the involvement of a distributor or a third party who facilitates the transaction on behalf of the investor, and the expense fee is comparatively high. 

This article covers: 

What is Direct Mutual Fund?

A direct mutual fund is a type of mutual fund where an investor can buy units of the mutual fund scheme directly from the mutual fund company or Asset Management Company (AMC) without the involvement of distributors or agents. In a direct mutual fund, no commissions or distribution fees are paid to intermediaries, resulting in a lower expense ratio than in a regular mutual fund. 

The lower expense ratio helps to higher returns for the investor. Direct mutual funds can be bought online or offline and identified by the word “Direct” prefixed in the fund’s name.

  • As there is no commission or distribution charge involved, the expense ratio of direct plans is lower than regular plans. This results in higher returns for the investors.
  • Due to the lower expense ratio, the NAV of direct plans is generally higher than regular plans. This means investors can get higher value for their investments. However, NAV should not be the only factor to consider while choosing mutual funds, you should also consider other factors such as past performance, fund manager experience, and the fund’s objective. 
  • Investors can invest directly with the fund house or through apps that charge zero commission/fees. This means no commission fee is deducted from the investment amount, resulting in higher returns.

Let’s understand with an example, there are 2 mutual funds: Mutual fund A and mutual fund B. They have an expense ratio of 1.29% and 2.15%, respectively. In both mutual funds, you start a SIP of Rs. 5,000 for 25 years at a 12% annual return. So after 25 years, mutual fund A which has an expense ratio of 1.29%, will get you Rs. 11 lakhs more than mutual fund B which has an expense ratio of 2.15%. So, this difference comes in direct and regular mutual plans because while investing in a direct mutual fund, you save around 1 to 1.5% of the distributor fee. 

What is Regular Mutual Fund?

A Regular Mutual Fund is a type of mutual fund in which an investor buys units of the mutual fund through a distributor, such as a broker, financial advisor, or bank, who charges a commission or fee for selling their mutual funds

To invest in a regular mutual fund, a distributor is involved in the process and goes to the fund house to finish the paperwork on your behalf. For this, you need to pay the distributor’s commission. This distribution commission is not paid separately by the investors. Instead, it is just a part of your mutual fund expense ratio. 

  • The expenses of regular mutual funds are generally higher than those of direct mutual funds, which do not involve any commission or fee paid to distributors. 
  • Regular mutual funds may provide the convenience of being able to invest through a financial advisor or broker, they may result in higher expenses and lower returns due to the commissions and fees charged.
  • Regular mutual funds offer access to expert advice from a professional fund manager. Hence, it is suitable for those who have just started their investment journey and have little knowledge of the stock market.

Impact of the commission fee paid to the distributor

This distributor’s commission of 1 to 1.5% may seem less to you because you think you will invest around Rs. 1 lakh in 1 year on which you have to give a commission of Rs. 1,000 to Rs. 1,500. But if you invest for the long term, you have to pay this commission every year from your total investment, and you also have to pay the same on the profit over your investment. So, if your investment is compounded, then your commission will also increase by compounding. 

Also,  every mutual fund is not tax saving mutual fund, so you should consider that there will be a tax on your whole income, and inflation will also affect your income because, after 25 years, expensiveness will be at a peak, and with that if you will give the distributor commission of Rs. 10 to Rs. 11 lakhs then your income will significantly go down. 

Difference Between Direct and Regular Mutual Funds

Factors Direct mutual fund Regular mutual fund 
Expense ratio Expense ratio is lower than regular mutual fund  Expense ratio is higher in regular mutual fund 
Involvement of broker or agent There is no involvement of any broker or agent. There is the involvement of any agent or broker. 
Returns Returns in direct mutual funds are high Returns in a regular mutual fund are low
Investment advice Not provided Investment advice is available 
NAV NAV is comparatively higher than regular plans NAV is low 
Market research Done by investors Done by the investment advisor 

1. Direct vs Regular Mutual Fund – Net Asset Value

The NAV of direct mutual funds is generally higher than that of regular mutual funds because direct funds don’t involve intermediaries or distribution expenses. Regular funds include distributor commissions, which are deducted from the NAV. Despite the difference in NAV, the impact on long-term returns may be minimal, and it shouldn’t be the sole factor when selecting a mutual fund.

2. Direct vs Regular Mutual Fund – Returns

In the case of regular mutual funds, the fee is higher because it includes commissions paid to intermediaries such as brokers, distributors, and agents. On the other hand, direct mutual funds do not involve intermediaries, so the expense ratio is lower. This lower expense ratio translates into higher returns.

3. Direct vs Regular Mutual Fund – Expense Ratio

Regular mutual funds typically have higher expense ratios than direct mutual funds, as the latter are sold directly to investors without intermediaries. Direct mutual funds’ lower expense ratio results from eliminating distribution costs, which benefits investors. Even a 1% difference in expense ratio can lead to significant losses in the long term, emphasizing the importance of considering the expense ratio when selecting a mutual fund.

4. Direct vs Regular Mutual Fund – Role of a financial advisor

Financial advisors are crucial in regular mutual funds, guiding clients based on their financial goals and risk appetite. Their commission is included in the expense ratio. In contrast, direct mutual funds involve minimal financial advisor involvement, as investors research and invest independently. This results in lower expense ratios due to the absence of commission fees. However, investors seeking advice may need to pay for such services separately.

5. Direct vs Regular Mutual Fund – Market Research

Regular mutual funds have research analysts who analyze market trends and provide investment advice, with access to various market research reports. In contrast, direct mutual funds do not have dedicated research teams; investors must conduct their own research and analysis. Some direct mutual fund platforms, however, may offer basic market information and tools to aid investors in making informed decisions.

6. Direct vs Regular Mutual Fund – Third-Party

Regular mutual funds involve intermediaries such as distributors and financial advisors who help investors choose suitable schemes based on their investment goals and risk appetite. In contrast, direct mutual funds allow investors to invest directly with the mutual fund company, eliminating third-party involvement and potentially lowering expense ratios. However, investors must conduct their own research, although some mutual fund companies offer online platforms or robo-advisors to assist with investment decisions.

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Direct vs Regular Mutual Funds- Quick Summary

  • Direct mutual funds are those where investors can invest directly without the involvement of any intermediaries or agents. Regular mutual funds, on the other hand, involve intermediaries such as brokers, distributors, and agents, who receive a commission for their services.
  • Direct mutual funds allow investors to invest directly in a mutual fund scheme by simply logging into the AMC’s website or buying offline from the registrar of mutual funds like CAMS or through an app-based platform. This makes investing easier and more convenient.
  • Regular mutual funds offer a commission to distributors for their services, which can help incentivize them to provide better advice and support to investors.
  • In direct mutual funds, investors must do their own market research and analysis, while in regular mutual funds, financial advisors provide investment advice.
  • If you want to start your investment journey, open a Demat account with Alice Blue. 

Direct vs Regular Mutual Funds- Frequently Asked Questions

1. What is the Difference Between Direct And Regular Mutual Funds?

In direct mutual funds, there is no involvement of any distributor or a third party to complete the transaction. On the other hand, in a regular mutual fund, there is the involvement of a distributor or a third party who facilitates the transaction on behalf of the investor. 

2. Which Mutual Fund is Better, Direct or Regular?

If you are a knowledgeable investor and are comfortable making investment decisions yourself, direct MF may be a better option for you. Regular mutual funds may be more suitable if you prefer professional advice and guidance.

3. Is it Good to Switch Mutual Fund from Regular to Direct?

Direct mutual funds generally have a lower expense ratio than regular mutual funds. This can lead to higher returns in the long term due to compounding effects. So, switching mutual funds from regular to direct can be a good option. 

4. Is it Good to Invest in Direct Mutual Funds?

Investing in direct mutual funds can be a good option for investors who understand the market and are comfortable making investment decisions on their own. 

5. Are Direct Mutual Funds Safe?

Yes, direct mutual funds are safe for investors to invest in. They are just as safe as regular mutual funds, as both types of funds are regulated by the Securities and Exchange Board of India (SEBI) and follow the same rules and regulations.

6. Who Should Invest in Direct Mutual Funds?

Direct MF is ideal for investors who have a good understanding of mutual funds and are confident in making investment decisions on their own. 

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