Direct vs Regular Mutual Funds: Know key differences and benefits before investing

A mutual fund is a type of investment instrument in which the funds collected from the investors are invested in shares, bonds, government securities, gold and other assets. Mutual funds are managed by fund managers, who are knowledgeable about analysing and managing investments. The combined holdings of the mutual fund house constitute its portfolio.

Every mutual fund scheme offers two types of plans: Direct and Regular. When comparing direct and regular mutual funds, there are three significant distinctions that are all interconnected and it should be taken into consideration by investors before choosing a plan.

The major factors that define direct and regular mutual fund plans are- how you purchase, the price or net asset value (NAV) and the total expense ratio.

Both plans have advantages and disadvantages as well. Investors should understand how these two plans operate in terms of cost structure and how it affects their returns before deciding whether to invest in Direct or Regular mutual fund schemes.

What Is A Direct Mutual Fund Plan?

Direct plans are purchased directly from the asset management company (AMC) with no intermediary. You can invest in direct plans online by visiting the AMC website or by visiting your local AMC or registrar’s office. The asset management company saves distribution costs (distributor's commissions) because mutual fund distributors are not involved in direct plan investments. As a result, when comparing regular vs direct mutual funds, direct plans have lower total expense ratio (TERs).

What Is A Regular Mutual Fund Plan?

Regular plans are purchased from mutual fund distributors. Mutual fund distributors provide services such as counselling customers on which mutual scheme to choose and submitting investors' Know Your Customer (KYC) documentation to RTAs or AMCs, assisting investors with the investment process (such as submitting application forms, cheques, and other documents to RTAs/AMCs), and providing services for existing accounts such as generating account statements, redemption requests, and so on.

As long as investors continue to invest in the regular mutual fund plans, the distributors receive fees from the AMCs for these services. These commissions are added to the total expense ratio of standard plans by the AMC. As a result, the TERs for Regular plans remain higher as compared to Direct plans.

What Is Total Expense Ratio (TER)?

The cost for managing a mutual fund is known as the total expense ratio. The TER is calculated as a percentage of the scheme's average Net Asset Value and the NAV is fixed after deducting the TER. Management fees, registrar's fees, trustee fees, marketing expenditures and distribution charges are collectively calculated under TER. It is one of the most essential variables for comparing direct plan vs regular plan.

Direct and Regular Plans: Key Differences

Returns: The difference in TER between regular and direct plans varies according to AMC commission structure. The TER difference between regular and direct plans might range between 0.5 per cent and 1 per cent. This has an immediate impact on the returns of both regular and direct plans.

Net Asset Value (NAV): The TER of any mutual fund plan is calculated by subtracting the NAV from the NAV. Because regular plan TERs are higher than direct plan TERs, direct plan NAVs are higher than regular plan NAVs.

Role of financial advisor: Direct plans are for do-it-yourself (DIY) investors because mutual fund transactions do not require the assistance of financial consultants. Online investment platforms for AMCs/RTAs, as well as transactions via mobile apps, have eased transactions for direct plan investors.