Difference Between Direct and Regular Mutual Funds

Mutual funds come in two versions direct and regular plans. In a direct plan, you purchase the mutual fund directly from the fund house or asset management company (AMC). Hence there is no intermediary involved.

In the case of a regular plan, a broker or distributor gets involved, and you purchase your mutual fund from them. The AMC pays a small fee to these intermediaries, which is recovered by charging a higher expense ratio from the investor. The expense ratio is the fee you pay the fund house to manage your investments.

Both have their own set of advantages and limitations. Read to find out the differences between direct and regular mutual funds and which one is better.

What are direct mutual funds?

Direct mutual funds are a type of mutual funds offered directly by the fund house, without any involvement of a third party, such as brokers and distributors. Since there are no intermediaries involved, there are additional commissions or brokerage. Hence, the expense ratio of this plan is lower compared to a regular plan.

You can purchase a direct plan online or offline. Along with AMC’s several online platforms, such as Jupiter Money and Groww, are offering direct mutual funds to investors.

The primary advantage of a direct plan in a mutual fund is that the expenses are low compared to a regular plan. Hence the returns are slightly higher in the long term.

However, with direct plans, you must manage your mutual fund portfolio. You are responsible for reviewing, monitoring, and rebalancing your portfolio regularly. Moreover, you must spend a lot of time on research to review the performance of your mutual funds.

What are regular mutual funds?

The fund house offers regular plans in mutual funds through aggregators such as distributors, advisors, and brokers. To invest in regular funds, you need not go to the AMC. Instead, you can approach these intermediaries who will help you invest in the mutual funds that best suit you.

They will assess your goals, investment horizon, and risk tolerance level and suggest funds. The intermediaries also offer regular portfolio monitoring and rebalancing. Investing in regular plans is very convenient as the intermediaries will take care of your investments for you.

However, they charge a small fee, increasing the total expense of investing. Hence the returns of regular plans are slightly lower than direct plans.

Differences between direct and regular mutual funds

Following are the key differences between the direct and regular plans.

Which are better regular or direct mutual funds?

Direct and regular plans are two different options of the same mutual funds. Both plans have the same fund manager, portfolio, and asset allocation. However, the direct plan has a low expense ratio and high NAV (net asset value) than the regular plan.

It is difficult to tell which one is better than the other as both direct and regular plans have their own pros and cons. The direct plan gives slightly higher returns than the regular plan due to lower expenses. However, if you invest in this plan, you must manage your own investments. From research to investing, monitoring, and rebalancing, you must do everything independently. To invest in a direct plan, you must have the market knowledge and the time to regularly monitor your portfolio. Hence direct plans best suit investors who can manage their own investments.

On the other hand, you don’t need any market knowledge for regular plans. Moreover, the intermediaries will do the research and portfolio review for you. They also ensure that your paperwork, bank mandate, and KYC is done either through an online or offline process. However, the returns for this plan are slightly lower as the expense ratio is high. Regular plans best suit investors who are just starting their investment journey or do not have time to manage their portfolios.

How to recognize if a mutual fund is direct or regular?

There is a misconception that if you are investing through a fund house, you are investing in the direct plan. An AMC offers both direct and regular plans. It’s not difficult to identify which plan you are investing in. The following will help you identify whether the plan is direct or regular.

• A direct plan will have the word ‘Direct’ or ‘Dir’ written against the name of the fund. Similarly, a regular plan will have ‘Regular’ or Reg’ against the name of the fund.
• Look at the expense ratio of the fund. The expense ratio of a direct plan is lower than regular plan.
• If you do not know which plan you have invested in, look at the Consolidated Account Statement (CAS); if the ‘Advisor’ field is blank, then it is a direct plan. If an ARN number (Application Reference Number) is written against this field, then you have invested in a regular plan.

What happens when I switch from regular to direct mutual funds?

When you switch between regular and direct plans, for taxation purposes, it will be considered as a redemption from an existing plan (regular or direct) and a fresh investment into a new plan (direct or regular).

So this means that when you switch from regular to direct, the fund will first redeem your investment from the regular plan and reinvest it into the direct plan. Since you redeem the units, any capital gains will be subject to taxation.

Mutual Fund Calculator

The question now arises: How will an investor know the difference in returns between direct and regular funds? A typical mutual fund calculator provides you with the future value and returns (CAGR) on your investment in the regular and direct mutual fund for comparison.

How to use Jupiter App to Invest in a Mutual Fund?

Jupiter Money is a digital banking application that allows customers to bank and invests on the same app. It helps customers to manage their savings accounts, make investments, and provide real-time spending insights. It also allows customers to track assets across bank accounts and manage transactions. You can buy Jupiter Money’s zero charges and zero-commission direct mutual funds on Jupiter.

Jupiter Money’s investment marketplace lets you quickly research and select the ideal investment option from various options, including mutual funds. They also provide you with services such as no-penalty SIPs and same-day NAV.

Benefits of Using Jupiter Money’s Mutual Fund Calculator

While making investments, you typically like to know how your investment will grow over the time horizon you plan to stay invested. Jupiter Money provides you with multiple calculators for different purposes. The mutual fund calculator can help you understand the expected future value and CAGR of your investments in Jupiter Money’s mutual funds.

The mutual fund calculator also shows you the difference between the investments’ returns in both direct and regular plans. This can be calculated by inputting the investment amount, investment method – lumpsum or SIP -, investment period, required rate of return, etc., for both versions.

Conclusion

You can invest in any of the plans. However, it is important to weigh the pros and cons of each of the plans against each other before choosing one. If you can manage your investment, and have the time and knowledge to do market research, then direct plans are better for you. If you do not have the time and knowledge to do market research and manage your portfolio, then the regular plan is better for you.

Frequently Asked Questions

1. Is it good to switch mutual funds from regular to direct?
   Direct funds have higher returns than regular plans. Hence, switching from regular to direct can fetch you high returns. So, if you are a market-savvy investor, who can manage your own portfolio, then you can consider switching from regular to direct funds.
2. What are the disadvantages of direct mutual funds?
   Direct mutual funds do not offer any value-added services such as regular portfolio review and rebalancing. You must do your own research and review. If you forget to review your portfolio, your returns can be affected.
3. What is the advantage of regular over direct mutual funds?
   Intermediaries, advisors and brokers offer regular mutual funds. They will help you right from the time of investing to redeeming. They will assess your resources, risk tolerance level, and goals and suggest you the right funds. They will also complete the paperwork for you. Moreover, they review your portfolio regularly to ensure you are on track towards achieving your goal. Although you pay an additional fee for regular mutual funds, they offer several services against it.
4. Is there any charge for switching mutual funds?
   When you switch between plans, you will redeem your investment from one plan and invest it as a new investment in another. The capital gains will be taxed upon redemption. Moreover, when you invest in a new plan, the expense ratio will be charged. Hence switching involves certain expenses.
5. Who should invest in direct plans of mutual fund schemes?
   Direct mutual funds are for experienced and market-savvy investors. This is because direct mutual funds do not offer value-added services such as portfolio management and market research. Thus, investors need to manage their own mutual fund investments. So, investors with market knowledge and experience should invest in direct plans.
6. How will you know whether your plan is regular or direct?
   The account statement you receive from the AMC shows direct plans prefixed with the word ‘direct.’
7. How is the commission paid to advisors and distributors, and what is its impact?
   AMC pays a commission each month, and your distributor and financial advisor will receive commissions based on the NAV of your investments, which is added to the expense ratio, affecting the NAV of your holdings.
8. Where will I get the total expense ratio for regular and direct plans?
   The total expense ratio details are available in the monthly factsheet of the funds, which can be downloaded from the websites of the AMCs.