Imagine you’re at an ice cream shop, faced with a choice- direct scoops from the tub or a pre-scooped cone. Well, choosing between direct vs regular mutual fund is a bit like that! Direct mutual funds are like scooping your own ice cream – you get more for your money because there’s no middleman. On the other hand, regular mutual funds come pre-scooped with a fee for the service.
In this financial flavor showdown, we’ll explore the differences between the two. Also, we will help you decide which one might be better for your financial portfolio.
So, let’s dive in and uncover the sage on direct vs. regular mutual funds!
(A) Understanding the concept of Direct vs Regular Mutual Fund
Let’s understand the whole concept of mutual funds and its two famous forms i.e. Direct vs Regular Mutual Funds.
(A.1) What is a mutual fund?
A mutual fund is like a money team-up. Many people put their cash together into one big pot, and then a professional money manager uses that money to buy a bunch of different things like stocks or bonds. When those things make money, everyone in the team gets a little piece of the profits. But if things don’t go well, the losses are shared too. It’s like sharing both the ups and downs of a financial adventure with others, making it easier and less risky to invest your money.
(A.2) What is Direct Mutual Fund?
In a direct mutual fund scheme, you directly invest your money with the mutual fund company, skipping any middlemen like brokers or distributors. Opting for direct plans means you interact directly with the fund house, usually leading to reduced expense ratios and charges. As intermediaries are excluded from the process, the returns you earn generally tend to be higher compared to regular mutual fund schemes.
Example
You can find direct mutual funds in all AMCs (Asset Management Companies) such as:-
- SBI Mutual Fund
- HDFC Mutual Fund
- Nippon India Mutual Fud
- L&T Mutual Fund
- Axis Mutual Fund
(A.3) What is a Regular Mutual Fund?
In a standard mutual fund scheme, when you invest, it’s typically done through an intermediary like a broker or distributor. These intermediaries offer guidance, help you with paperwork, and provide customer support. However, they do charge commissions and fees, which can impact your returns in the long run. As a result, the expense ratios in regular mutual fund schemes tend to be higher due to these extra expenses.
Example
- HDFC Equity Fund
- ICICI Prudential Bluechip Fund
- SBI Magnum Multicap Fund
- Franklin India Ultra Short Bond Fund
(B) Direct vs Regular Mutual Fund: Comparative Analysis
You will get thorough information on direct vs regular mutual fund in the following table-
| Key Aspects | Direct Mutual Fund | Regular Mutual Fund |
| Mode of Investment | Direct (from Asset Management Company through an online platform) | Indirect (through an intermediary) |
| Intermediates (Middlemen) | Absent | Present (Broker/ Financial Advisor) |
| Commission (Fees paid to intermediaries) | Not Required | Required |
| Expense Ratio | Lower (due to no commissions/ distribution fees) | Higher (due to payment of commissions/distribution fees to brokers) |
| Returns | Potentially higher | Lower due to multiple commissions |
| Choice of Funds | Wide range of options | Limited |
| Investment Research | Self-research required | May receive advice from intermediaries |
| Cost of Investment | Typically lower | Higher due to commissions |
| Transparency | Higher | Lower |
Direct vs Regular Mutual Funds offer distinct modes of investment, each with its own set of characteristics and considerations. Let’s discuss them one by one-
(B.1) Mode of investment
In the mode of investment, Direct Mutual Funds enable investors to engage directly with the mutual fund company or via online platforms, bypassing intermediaries like brokers or financial advisors. In contrast, Regular Mutual Funds involve an intermediary in the investment process, typically a broker or financial advisor who assists in the fund selection and purchase.
(B.2) Presence of Intermediaries
In direct mutual funds, you don’t need any intermediaries or brokers. You can invest directly in the funds of AMCs (Asset Management Companies). On the other hand, a broker is always present in a regular mutual fund. Those brokers mediate information and deals between you (the investor) and the AMC. Hence, he receives a commission through this.
Do you know where the commission is paid to the broker? From the profits, you earned through the mutual funds’ investment. Hence, you receive lower returns on Regular Mutual Funds.
(B.3) Expense Ratio
It refers to the administrative expenses (amount) deducted from the investors. Expense ratios differ significantly between the two. Direct Mutual Funds generally feature lower expense ratios because they don’t entail commissions or distribution fees to intermediaries.
Conversely, Regular Mutual Funds tend to carry higher expense ratios due to the commissions and fees paid to these intermediaries. This disparity in expenses can impact overall returns.
(B.4) Returns & NAV (Net Asset Value)
Returns on investments can also diverge. Direct Mutual Funds have the potential for higher returns over the long term due to their lower expenses and absence of commission charges. In contrast, Regular Mutual Funds usually yield lower returns because of their higher expense ratios and commission charges, which can erode returns.
(B.5) Choice of Funds
Investment choices vary as well. Direct Mutual Funds provide access to a broader array of mutual funds and investment options, including both regular and direct plans. On the other hand, Regular Mutual Funds limit investors to regular mutual fund options distributed by intermediaries.
Despite vast options, Direct mutual funds are simpler in nature as compared to Regular mutual funds. Because the former doesn’t involve any hassle with intermediaries (brokers).
(B.6) Investment Research
Regarding investment research, Direct Mutual Funds necessitate investors to conduct their research or rely on online resources for information. In contrast, investors in Regular Mutual Funds may receive advice and recommendations from intermediaries, potentially impacting their investment decisions.
(B.7) Investment Process
The investment process also differs. For Direct Mutual Funds, investors need to complete the KYC (Know Your Customer) process and can invest directly through the fund house’s website or direct online platforms. For Regular Mutual Funds, investors can purchase them through brokers, agents, or financial advisors who facilitate the investment process.
(B.8) Overall Investment Cost
The cost of investment is typically lower for Direct Mutual Funds because they don’t involve distributor commissions. This makes them cost-effective, especially for long-term investors. In contrast, Regular Mutual Funds have higher costs due to distributor commissions, which can reduce overall returns.
(B.9) Transparency
In terms of transparency, Direct Mutual Funds offer higher transparency. Investors deal directly with the fund house and can track their investments online, accessing comprehensive information. On the other hand, Regular Mutual Funds may have lower transparency as investors may not have direct access to all details and might rely on intermediaries for updates.
Note: Have you heard about the Axis Mutual Fund Scam? It gave a huge shock to investors. For more details check out the article “Full Breakdown of Axis Mutual Fund Scam.”
Ultimately, the choice between Direct and Regular Mutual Funds depends on your (individual) preferences, investment goals, and the level of involvement you wish to have in managing your investments. Each option has its merits and drawbacks, and investors should carefully consider their needs before making a decision.
(C) Direct vs Regular Mutual Fund Schemes Performance
Let’s compare the performance of some direct and regular mutual funds.
| Scheme’s Name | Direct/Indirect | 1 Year (%) | 3Years (%) | 5 Years (%) | 10 Years (%) |
| ICICI Pru Small Cap Fund | Direct | 24.73 | 42.83 | 21.59 | 20.13 |
| Indirect | 23.29 | 40.93 | 20.04 | 19.03 | |
| Difference in the rate of return | 1.44 | 1.9 | 1.55 | 1.1 | |
| Nippon India Growth Fund | Direct | 25.49 | 33.87 | 19.17 | 21.53 |
| Indirect | 24.48 | 32.85 | 18.33 | 20.65 | |
| Difference in the rate of return | 1.01 | 1.02 | 0.84 | 0.88 | |
| HDFC Flexi Cap Fund | Direct | 23.67 | 32.82 | 16.05 | 19.09 |
| Indirect | 22.86 | 31.98 | 15.32 | 18.24 | |
| Difference in the rate of return | 0.81 | 0.84 | 0.73 | 0.85 | |
| UTI Flexi Cap Fund | Direct | 6.48 | 20 | 12.41 | 16.59 |
| Indirect | 5.65 | 19.06 | 11.63 | 15.37 | |
| Difference in the rate of return | 0.83 | 0.94 | 0.78 | 1.22 |
Why you must check the schemes thoroughly?
When you opt for direct plans, you typically benefit from a lower expense ratio, saving around 0.6–1% compared to regular plans. This can potentially translate into higher returns for you. For instance, if you invest Rs.15,000 monthly in a direct plan with a 12.5% growth rate, it could grow to Rs.35.5 lakh in ten years, whereas the same investment in a regular plan with a 12% growth rate would yield Rs.34.5 lakh.
It’s important to recognize that investing without expert guidance can cost you more than Rs.1 lakh over a decade, especially when markets get volatile. The rate of SIP stoppage in direct plans during such times highlights this fact. Remember, published returns matter less than what you actually earn.
Now, if you choose regular plans, you should ask yourself whether that additional 0.5% can provide you with the value of expert management, technology, discipline, and best practices. Emotions often play a significant role in investing, making that 0.5% difference crucial for achieving your financial goals.
In the end, your decision between direct and regular plans should revolve around whether you prioritize commission savings or the achievement of your financial objectives. Keep in mind that investing in mutual funds is not a straightforward endeavor!
(D) Advantages & Disadvantages of Direct Mutual Funds
(D.1) Direct Mutual Funds Advantages
| Advantages | Description |
| Lower Expense Ratios | Direct mutual funds typically have lower expense ratios compared to regular plans, which can lead to higher returns. |
| Potential for Higher Returns | Lower expenses mean that more of your investment capital is working for you, potentially resulting in better returns over time. |
| Transparency | Direct plans offer greater transparency in terms of costs and fees, making it easier for investors to understand where their money is going. |
| Cost Savings | By avoiding distributor commissions, direct plan investors can save money in the form of lower ongoing expenses. |
| Control & Flexibility | Investors have more control over their investment decisions and can make changes as per their preferences without relying on an intermediary. |
| No Conflicts of Interest | Direct plans eliminate potential conflicts of interest that can arise when distributors receive commissions for recommending specific funds. |
(D.2) Direct Mutual Funds Disadvantages
| Disadvantages | Description |
| Lack of Expert Guidance | Direct plans may lack the guidance of a financial advisor or fund manager, requiring investors to make their own investment decisions. |
| No Financial Advice | Investors in direct plans need to conduct their own research and may miss out on professional advice that could help optimize their portfolios. |
| Higher SIP Stoppage | During market volatility, investors in direct plans may be more prone to stopping their SIPs due to a lack of guidance, potentially impacting long-term goals. |
| Limited Access to Platforms | Some investment platforms may not offer a wide range of direct mutual fund options, limiting the choice for investors. |
| Learning Curve | Managing investments in direct plans requires a certain level of financial literacy and time commitment, which may not be suitable for all investors. |
| Behavioral Biases | Investors may succumb to behavioral biases such as fear and greed when making investment decisions without professional guidance. |
(E) Advantages & Disadvantages of Regular Mutual Funds
(E.1) Regular Mutual Funds Advantages
| Advantages | Details |
| Professional Management | Regular mutual funds are managed by professional fund managers who make investment decisions on your behalf. |
| Access to Expertise | Investors benefit from the expertise and research capabilities of fund managers and their teams. |
| Convenience | They offer convenience through easy access and the ability to invest through agents, advisors, or platforms. |
| Guidance and Support | Regular funds often provide investors with guidance and support from financial advisors or intermediaries. |
| Diversification | Regular mutual funds offer diversification by pooling money from multiple investors to invest in a variety of assets. |
| SIP and Systematic Investment | They offer the option of Systematic Investment Plans (SIPs) for regular, disciplined investing. |
(E.2) Regular Mutual Funds Disadvantages
| Disadvantages | Details |
| Higher Expenses | Regular mutual funds typically have higher expense ratios due to distribution and commission costs, which can eat into your returns. |
| Front-End Load | Many regular funds charge a front-end load or sales commission when you invest, reducing your initial investment amount. |
| Conflicts of Interest | The distribution network may prioritize funds that offer higher commissions, potentially leading to biased advice. |
| Limited Flexibility | You may have limited control over your investments, as fund managers make portfolio decisions. |
| Lack of Transparency | Costs related to commissions and distribution may not be as transparent as with direct plans. |
| Potential for Mis-selling | Some investors may be sold funds that are not aligned with their financial goals due to commissions. |
(F) Final Thoughts for Direct vs Regular Mutual Fund: Which one is better?
When choosing between Direct vs Regular Mutual Fund, it’s crucial to understand the differences to make an informed investment decision.
Direct Mutual Funds offer you lower expenses, the potential for higher returns, a broader range of choices, and greater transparency. If you’re a self-reliant investor who’s willing to conduct your own research, these can be the preferred option.
Contrarily, Regular Mutual Funds provide you with the convenience of expert advice, but they often come with higher costs due to intermediary commissions and may have lower transparency.
The “better” option for you depends on your preferences and goals, so consider what aligns best with your financial strategy.
