Mutual Funds are the go-to investment choice among investors, which helps them to diversify their stock portfolios across different investment sectors. They are the preferred investment option among both salaried employees and business owners.
When compared, mutual funds can be of two types – Direct vs Regular Mutual Funds.
If you are not well acquainted with the stock market but willing to invest in mutual funds, you can rely on stock advisors, distributors, or agents. Such an investment in the mutual funds would be an investment in Regular Mutual Funds. Whereas you are well acquainted with the stock market and can track the market movement, you can directly approach the mutual fund company and invest. Such an investment would be in Direct Mutual Funds. Both versions invest in the same assets and are managed by the same mutual fund manager.
Read along to learn more about Direct vs Regular Mutual Fund!
A direct mutual fund has a lower expense ratio as an AMC directly distributes it. It does not involve intermediary parties like a broker, advisor, or distributor; therefore, no commission or brokerage adds to the expenses.
A regular plan is a kind of mutual fund bought through third-party intermediaries. They charge the AMC a specific fee for distributing and selling their mutual funds, which the fund house typically recovers through the expense ratio. This makes the expense ratio slightly higher for regular funds than direct mutual funds, making the returns slightly lower for standard plans. A regular plan is ideal for investors who are beginners or don’t have sufficient knowledge about the market or time to perform due diligence on investments.
Investors who are beginners or don’t have much expertise or time to research and analyze their investments find regular plans better. This is primarily because the mutual fund company and fund manager provide information and advice to make a decision.
Investors with sufficient market knowledge can buy the mutual funds directly from an AMC, thus saving on expenses. Therefore, if you have sound knowledge of mutual funds and want to increase the returns on your investment by reducing the expense ratio, you can consider investing in direct funds.
Three elements define the differences between regular and direct mutual funds: the expense ratio, the Net Asset Value (NAV), and how you buy the funds. In both regular and direct plans, AMC invests the money pooled from investors in various securities to create a mutual fund. One significant difference in how the plans work is that AMC sells direct plans directly to investors, whereas they sell regular plans through intermediaries.
Let us consider the following pros and cons of each plan type to understand which one is better or a significant investment decision for you: mutual fund direct vs regular:
Factors | Direct Plan | Regular Plan |
Higher Returns | No third-party commission and brokerage are involved resulting in a lower expense ratio, and hence profits passed on to investors are higher than that of regular plans | Third-party commission and brokerage are playable, resulting in a higher expense ratio, and hence profits passed on will be lesser than that of direct plans |
Better NAV | The direct plan has higher returns because of the lower expense ratio. The compounding effect results in a higher NAV for the direct plan | The regular plan has a higher expense ratio and hence lower returns compared to the direct plan |
Risk factor | The onus of doing due diligence and closely tracking fund performance is on investors in direct plans. | Professional fund managers manage the portfolio to minimise the risks |
Professional advice | In a direct plan, the investor has to rely on their knowledge | Intermediaries have an in-depth understanding of investments and can guide investors to earn higher returns |
Additional services | No additional services are available under direct plans | Investors get a few value-added services like maintaining investment records, providing tax records during return filing, facilitating redemptions, etc. |
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.
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 from various options, including mutual funds. They also provide you with services such as no-penalty SIPs and same-day NAV.
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.
The question is not whether a direct or regular mutual fund, which is better. It is instead which one suits you. Ideally, a beginner with no or little knowledge about markets and investments must choose regular plans because the intermediaries help you with advice and suggestions.
The direct mutual fund is the best bet if you are a seasoned investor looking for higher returns. You need to weigh the pros and cons of both versions, comparing them with your profile, before choosing the right plan for the mutual fund
The account statement you receive from the AMC shows direct plans prefixed with the word ‘direct.’
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.
The total expense ratio details are available in the monthly factsheet of the funds, which can be downloaded from the websites of the AMCs.
You can switch from a regular to a direct plan. It will, however, be treated as a regular redemption, where an exit load will be charged if you switch within the exit load period. The shift will also attract short-term and long-term capital gains tax as applicable. The short-term is one year for equity funds and three years for non-equity funds.
