Difference Between Direct and Regular Mutual Funds

12 Mins

A Direct plan is what you buy directly from the mutual fund company (usually from their own website). Whereas a Regular plan is what you buy through an advisor, broker, or distributor (intermediary). In a regular plan, the mutual fund company pays a commission to the intermediary. This is then recovered as an expense from the plan. In mutual funds speak, the expense ratio is higher for a regular plan. Read along to understand Regular Vs Direct Mutual Funds in detail.

Differences Between Direct and Regular Mutual Fund Schemes

The following table summarizes regular plan vs direct plan:

Parameter	Direct Plan	Regular Plan
Third-Party	Not Present	Present
Expense Ratio	Low expense ratio (no additional fees to broker/agent)	High expense ratio (includes a commission to distributor/agent)
NAV	High due to low expense ratio.	Low due to high expense ratio.
Returns	Marginally higher returns due to a low expense ratio.	Marginally lower returns due to a high expense ratio.
Market Research	Done by Self	Done by advisor
Investment Advice	Not Available	Provided by advisor

From the above Regular growth vs Direct growth mutual funds comparison, regular mutual funds are best suited for investors who seek financial advice. Even though regular plans seem costly when compared to direct mutual funds. The small percentage of the additional cost is worth the right investment decision. Therefore, compared to an uninformed wrong decision, well-researched advice can earn higher value.

What are Direct Mutual Funds?

Direct Mutual Funds is the type of mutual fund that is directly offered by the AMC or fund house. In other words, there is no involvement of third party agents – brokers or distributors. Since there are no third party agents involved, there are no commissions and brokerage. Hence the expense ratio of a direct mutual fund is lower. Thus, the return is higher due to a lower expense ratio. The direct plan of a mutual fund can be easily identified; the word ‘Direct’ is prefixed in the name of the fund. These mutual funds can be bought through either online or offline mode.

What are Regular Mutual Funds?

Regular plans are those mutual fund plans that are bought through an intermediary. These intermediaries can be brokers, advisors, or distributors. The intermediaries charge the fund house a certain fee for selling their mutual funds. The AMCs usually recover this fee through expense ratio. The expense ratio for regular mutual funds is slightly higher than direct mutual funds. Hence the returns tend to be a little higher for direct plans. A regular plan best suits investors who do not have the knowledge about the market nor the time to monitor their portfolio. Therefore, a regular plan is far more convenient for investors who aren’t well informed about the market. They receive expert advice at a nominal fee.

In 2012, SEBI introduced the direct plans in Mutual Funds. This was to enable investors to buy mutual funds without any intermediary in between. Both the options – direct plan and regular plan are managed by the same mutual fund manager. They invest in the same assets as well. However, the major difference is that in a regular plan, the fund house pays commission as a distribution fee. While in the direct plan, there is no such commission or fee.

Advantages of a Regular Plan over Direct Plan in Mutual Funds

While regular mutual funds have a slightly higher expense ratio and marginally lower returns, they have quite a few advantages.

Convenience

Investing in a mutual fund isn’t as easy as it looks. An investor has to assess his profile on the basis of risk and financial needs. Then find the mutual fund that fits into this criteria. And finally, invest in the mutual fund. All this is a time taking process. An intermediary will have knowledge of the existing mutual funds. And will help find the best fit based on investors’ profiles. On the other hand, the direct plan lacks this. As a result, investing in a regular plan is convenient.

Professional advice

Intermediaries have in-depth knowledge of the huge array of mutual funds. Hence can assess an investor’s profile to find the best fit for them. A qualified advisor can guide the investors during their investment journey and even impart market knowledge to them to earn higher returns. So, only a regular plan has the option for professional advice. However, in a direct plan, the investor has to rely on his own knowledge.

Regular portfolio monitoring and review

Markets are dynamic and ever changing. As an investor, it would be hard to keep up with the market regularly. In a regular plan, intermediaries keep track of the market and monitor their client’s portfolios regularly. Also as needed, they advise on restructuring it. Investors opting for a direct plan have to take time out to monitor their portfolio regularly.

Value-added services

Intermediaries provide a few additional services for investors’ convenience. Such as keeping a record of investor’s investments, provide tax proofs during tax filing, facilitate redemptions, or etc. All these services aren’t available in direct plans. On the other hand, a regular plan comes with all these value added services.

Which is Better: Direct Plan Vs Regular Plan in Mutual Funds?

Direct and Regular plans are just two different options of the same mutual fund scheme. It is managed by the same fund manager and investments for both is in the same stocks and bonds. The major difference between the two is that for regular funds the AMC pays commission to the broker as transaction fees or distribution expense, while for direct funds no such commission is charged. This is because when you invest through a direct plan, there is no intermediary and all the costs associated with it are eliminated. For this very reason, direct plans have less expense ratio.

NAV of the direct plan is higher compared to a regular plan. Does that mean choosing a direct plan is beneficial for investors? NAV shouldn’t be the only factor that you should consider while investing. Various other factors like whether you have enough knowledge to pick the right fund for you, and have the right knowledge to maintain your portfolio. If not, its best to go with an advisor who does all this for you at a very minimum cost. Despite the expenses being higher in regular funds, the overall portfolio returns would be higher in regular funds due to the advisor’s continuous monitoring and rebalancing of the portfolio to generate higher returns.

How To Recognize If a Mutual Fund is Regular or Direct?

It is important to know which plan you are about to invest in. It is a common myth that if you are investing through the AMC then the fund will be a direct fund. Even if you are investing through an AMC, broker, intermediary, or investment platform both the schemes are available with them. You can easily identify whether a plan is a direct investment plan or a regular scheme.

The scheme name will always have the words ‘Direct’ or ‘Dir’ to indicate that it is a direct plan. Similarly, in the case of a regular fund, the fund name will contain the term ‘Regular’ or ‘Reg’
The expense ratio for a regular plan will be higher than the direct plan
You can also refer to your CAS- Consolidated Account Statement. In your CAS you will find a field called ‘Advisor’. If the scheme is a regular plan then ‘ARN’ followed by a number will be mentioned in the field ‘Advisor’.

What’s the Difference between the Total Expense Ratio of Direct and Regular Plans?

Total Expense Ratio is the fees that the fund house charges for managing and operating the fund.

In a direct plan, the TER is lower compared to a regular plan. In a regular plan, the total expense ratio includes the fees to the distributor or advisor who helped you get into that plan. That extra payment makes the TER higher for the regular plan.

But in a direct plan, there are no middlemen, and you are directly investing in the fund. That’s why the TER is lower in direct plans.

How Does the Expense Ratio Impact the Returns of Direct and Regular Plans?

To under the impact of expense ratio on returns, let’s take the example of Krish and Kedar. Both invested INR 1,00,000 in the Canara Robeco Bluechip Equity Fund 10 years ago. However, Krish invests in a direct plan, while Kedar invests in a regular plan. The value of their investment as of today is

Krish: INR 4,22,493 (10Y return 15.5%)

Kedar: INR 3,70,722 (10Y return 14%)

Since Krish invested through the direct plan, the expense ratio was lower, and thus returns were higher.

Even though the disparity in the expense ratio between direct and regular plans hovers around 1%, this seemingly small percentage can translate into a substantial difference in your total corpus over the long term (INR 51,771).

Conclusion

Regular vs direct mutual fund, which is better, isn’t the question here. Does it suit you or not? For an investment savvy investor who has the market knowledge, expertise, and time to arrive at the best mutual fund to invest, a direct mutual fund best suits him/her. Paying an advisor, the additional fee is not worth it as it doesn’t add any extra value. While most investors require investment assistance. Those seeking such advice can invest in the best funds recommended by their advisor or distributor. The investment can then be made in a regular plan or a direct plan. Scripbox is one such investment platform that recommends the right funds based on investor needs and goals. It provides its investors with an array of well-researched investment options.

Frequently Asked Questions

Is there any charge for switching mutual funds?

Usually, there is no separate charge for switching from regular to direct plans within the same mutual fund scheme. However, any switch of plans involves simply selling the units under one plan and buying units of another plan. Hence, the capital gain tax will arise depending on the period of holding and the type of mutual fund.

How do I change the mutual funds from regular to direct?

You can easily switch from regular to direct mutual funds. To switch or change your mutual fund investment plan you can use your investment account. Login to your account, go to the fund investment page and select the option of ‘Switch’ plans. Simply place your request online through your account with your investment manager or broker. It might take up to 5 working days to process your request. Alternatively, you can visit the branch of the AMC and fill out an offline form. This option can be time-consuming and troublesome. However, if you are not comfortable with the online method then you can avail of the offline method.

What are the disadvantages of direct mutual funds?

Under a direct mutual fund, the investor needs to select the funds to invest in. This requires an analysis of past performance and other factors like future prospects. This might be overwhelming considering the large number of schemes offered by the AMCs. Moreover, direct investment in mutual funds involves a continuous performance assessment. Hence, the disadvantage is that it requires an in-depth analysis for the selection of funds and evaluation of the scheme post investment.

Why is a regular mutual fund better than a direct mutual fund?

Both regular schemes and direct plans are ideal for investors. The aspect which is better depends on the investor and his or her preferences. If the investor possesses an in-depth knowledge of the financial market and time to invest, then a direct fund is suitable. On the contrary, if an investor is looking for investment advice and wishes to invest in well-researched funds then regular funds are a better choice.

How do I change the SIP from regular to direct?

To change the SIP from a regular plan to a direct plan you need to switch from one plan to another. You will have to switch your investment from a regular plan to a direct plan. Then set the SIP transaction again with the new plan. This switch will involve selling the units under one plan and buying under another plan.

Who should invest in direct plans of mutual fund schemes?

Investors who wish to directly deal with individual fund houses rather than intermediaries should consider investing through direct plans. Above all, investors with the capacity and knowledge to study mutual funds by doing their own research can invest in direct funds. The entire process of application, documentation, tracking, portfolio reviewing, compliance issues etc. should be taken care of by the investor. Therefore, investors who want to increase returns by reducing the expense ratio and have good knowledge of mutual funds can consider investing in direct funds.

How much extra does investing through a regular plan cost me, as opposed to a direct plan?

Currently direct plans of equity mutual funds have expense ratios that are typically 0.4-0.5% lower than regular plans. This means that your return by opting for the direct plan is higher by that amount. This approx 0.5% is indirectly a fee that you pay Scripbox for our services. This is similar to the fee you pay your doctor, lawyer or other professionals.

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