Direct vs Regular Mutual Fund Difference: Which one is better?

 

Primarily mutual funds are available in two versions – Direct and Regular mutual fund.

The basic difference between direct and regular mutual fund is that a regular mutual fund comes with an associated distribution commission which isn’t the case with direct mutual fund. Due to the absence of the commission the expense ratio of direct mutual funds is way lesser than regular mutual funds thus helping you generate higher returns on your investments.

What is a Direct Mutual Fund?

Direct Mutual Fund Scheme: You can invest in this scheme directly with the Asset Management Company (AMC), without the need of a middleman. This can be done through the AMC's website, by visiting their office, or by working with SEBI Registered Investment Advisors (RIAs). Since no mutual fund distributor is involved, the AMC does not need to pay for their commission, resulting in lower Total Expense Ratios (TERs) for direct plans compared to regular mutual funds.

What is a Regular Mutual Fund?

Regular Mutual Fund Scheme: Through mutual fund distributors, investors can purchase regular plans. Distributors provide advice on which mutual fund to invest in, submit the investor's KYC documents to RTAs or AMCs, and help with the investment process by submitting application forms and cheques. For these services, the distributors receive commissions from the AMC for as long as the investor remains invested in the regular plans. The AMC adds these commissions to the TER of regular plans which makes the TERs higher than those of direct plans.

Difference Between Direct and Regular Mutual Funds

Investing in direct funds differs from regular mutual funds in a number of ways, as detailed below:

● Returns: 

Direct plans provide higher returns in the long run due to lower expense ratios. Regular plans include commissions, resulting in higher TER and lower returns. Differences in TERs can range from 0.5-1%, which affects returns. Over a long period, investing in a direct plan can lead to a substantial difference in returns.

● Expense ratio:

Regular plans usually have higher expense ratios compared to direct plans, while direct plans offer higher returns and more convenience in terms of investment.

● Net Asset Value (NAV):

The Total Expense Ratio (TER) of a mutual fund plan affects the Net Asset Value (NAV). Regular plans have higher TERs than direct plans, meaning the NAV of direct plans is higher than regular plans. Consequently, the value of your investment after purchase will be higher with a direct plan than with a regular plan.

● Intermediary: 

A direct mutual fund is one in which there is no intermediary present. In this kind of fund, investors buy the fund directly from the Asset Management Company (AMC), whereas in a regular fund, an intermediary, such as a broker, is involved and receives a commission as a result.

● Convenience:

In terms of ease of use, direct plans are usually accessible online, permitting investors to conduct transactions and follow their investments autonomously.

Thus, investors should carefully consider all these differences before investing in a direct fund.

Factors to consider for investing in Mutual Funds

When investing in mutual funds, there are several important factors to consider when making informed and effective investment decisions. Here are some critical factors for you to keep in mind:

● Investment objectives and goals: 

Clearly define your investment goals and objectives. Are you seeking long-term wealth accumulation, regular income, or a combination? Your goals will help you choose the right type of mutual funds that align with your financial aspirations.

● Risk tolerance: 

Assess your risk tolerance level. Different mutual funds carry varying levels of risk. Determine how much volatility you are comfortable with and choose funds that match your risk profile.

● Fund category and type: 

Mutual funds come in various categories, such as equity, debt, hybrid, and thematic funds. Select the category that best suits your investment goals and risk tolerance. Additionally, consider whether you want actively or passively managed index funds.

● Past performance: 

While past performance does not guarantee future returns, it can provide insights into a fund’s track record. Compare a fund’s historical performance against relevant benchmarks and peers to assess its consistency and performance during different market cycles.

● Expense ratio:

The expense ratio represents the fund house’s annual fees and operating costs. Lower expense ratios can positively impact your overall returns, especially over the long term.

● Fund manager:

Wealth management requires a qualified fund manager with a successful track record. Researching the fund manager's background is essential.

● Portfolio holdings: 

Examine the holdings within the fund's portfolio. Diversification across different securities and sectors can help manage risk. Make sure the fund's holdings align with your investment objectives.

● Exit load and tax implications:

Be aware of the exit load (mutual fund fees charged for redeeming the units within a certain period) associated with the fund. Additionally, understand the tax implications of investing in different types of mutual funds, as taxation varies based on factors like fund category and holding period.

● Investment horizon:

Determine your investment horizon—the time you plan to stay invested. Different funds are suitable for different timeframes. The longer your investment horizon, the more likely you are to benefit from compounding and absorb market volatility.

● Systematic Investment Plan (SIP): 

Consider using SIPs to invest regularly and systematically. SIPs can help you benefit from rupee cost averaging and reduce the impact of market volatility.

● Transparency and disclosures:

Evaluate the fund house's transparency in providing information about fund performance, holdings, expenses, and other important details. Look for funds that provide clear and comprehensive disclosure.

Other alternative investment option

If you are looking to grow your wealth along with a life cover then you can consider ULIPs as an investment option. In ULIP Plan, the investment risks in the investment portfolio is borne by the policyholder.

Conclusion

Investors should remember that mutual fund investments should align with your overall financial plan and risk tolerance. Diversifying your investments across different asset classes and funds is a good practice to manage risk effectively.

FAQs about Difference Between Regular and Direct Mutual Fund

Q. How will I know if I have invested in Direct or Regular Plan?

Ans. Your Mutual Fund statement will indicate the plan you have selected.   

Q. Which is better regular or direct mutual fund?

Ans. Direct funds are better because of lower expense ratio helping you generate higher returns on your investment.

Q. How will I know the difference in TER of regular and direct plans?

Ans. Regular plans have higher TER than direct plans. Check the website or with your financial advisor for details.

Q. Why regular funds are better than direct funds?

Ans. Regular funds offer advice from a financial advisor, making them better for inexperienced investors, whereas direct funds do not.

ARN - ED/12/23/7173