Regular vs Direct Mutual Fund: A Detailed Comparison

If you are new to investing or exploring mutual funds, you have likely encountered terms like regular plans and direct plans. 

But what exactly sets them apart? Simply put, regular plans are sold through distributors or agents, while direct plans let you invest directly with the fund house, often at lower costs.

Curious to learn more? Discover the key differences between regular vs direct mutual funds here.

Key Takeaways

• Regular MFs have lower NAV as compared to Direct MF.
• Expense ratio for regular mutual funds is higher than the direct mutual funds.
• Regular mutual funds can be bought through an intermediary or advisor, while a direct mutual fund can be bought directly from a fund house.

Meaning of Regular Mutual Fund

When you buy a mutual fund through a distributor, you are investing in a regular mutual fund. The distributor is responsible for submitting your application and KYC documents to the AMC. However, due to the involvement of a distributor, the total expense ratio is usually relatively higher compared to direct mutual funds. 

Benefits of Regular Mutual Funds

Here are the benefits of investing in regular mutual funds:

1. Advice from Distributor: In the case of regular mutual funds, you will get expert advice from distributors. Experienced distributors and their representatives can guide you to minimise risks while maximising returns through appropriate fund selections. 
2. Diversification: With your advisor’s support and your personal preference, you can effortlessly diversify your portfolio across various funds and sectors, enhancing your potential for better returns.
3. Regular Monitoring: Regular mutual funds do not require performance monitoring by the investor, unlike direct mutual funds. You can trust the fund manager’s decisions and rely on your distributor’s ongoing advice for optimal results.

Meaning of Direct Mutual Fund

A direct mutual fund is one you purchase directly from the Asset Management Company without involving any intermediaries. You can invest in direct mutual funds offline by visiting the AMC office near you, online from the concerned AMC’s official website or by connecting with a SEBI-registered Investment Advisor (RIA). This minimises your costs and expense ratio compared to regular mutual funds.

Benefits of Direct Mutual Funds

The following are the benefits of direct mutual funds:

1. Lower Expense Ratio: For direct mutual funds, you have to bear a lower expense ratio as there is no third-party involvement. This ensures a relatively higher return for you as an investor.
2. Higher NAV: NAV (Net Asset Value) significantly affects the expense ratio. As the expense ratio is lower in direct mutual funds, the NAV is usually higher than regular mutual funds. 
3. Higher Returns: As direct mutual funds do not involve brokerage or commission to middlemen, the returns from this investment are higher. With the power of compounding, small differences in expense ratios lead to high returns.

What is the Difference Between a Direct and a Regular Mutual Fund?

Here are the key differences between regular vs direct mutual funds:

Regular vs Direct Mutual Fund: Which One is Better?

As direct mutual funds do not involve an intermediary, the total expense ratio is lower (TER). This results in a higher NAV and higher return. On the flip side, regular mutual funds have to pay brokerage or commission to distributors. As a result, they have a lower NAV and lower return for investors.

Let us consider the example below to understand the scenario:

For instance, Mr X invests in a regular mutual fund from distributor Y. The distributor, being an intermediary or agent, will charge a commission which the AMC will collect from Mr X as an expense ratio, say 1.08%. 

On the flip side, if Mr X purchases a direct mutual fund from AMC Z, he will not have to pay for the intermediary. As a result, the investment cost is lower, leading to a lower expense ratio, say 0.60%. Consequently, Mr. X benefits from higher net returns, as a smaller portion of his investment is consumed as expenses.

If you want a higher return with a lower expense ratio, choose a direct mutual fund. However, if you need expert advice, choose a regular fund and pay a higher expense ratio for the advice. 

How to Identify Direct Mutual Fund vs Regular Mutual Fund?

You can identify regular vs direct mutual funds in the following way:

• Look for the terms ‘Regular’ or ‘Reg’ and ‘Direct’ or ‘Dir’ in the fund name.
• Ensure you check the expense ratio. A lower expense ratio indicates it is a direct mutual fund. 
• Check the NAV of the fund. A higher NAV indicates a direct mutual fund.
• In your statement, check the ‘Advisor’ section. If there is an ‘ARN’ (AMFI Registration Number) with a number listed, it indicates it is a regular fund.

Final Words

Now that you know the difference between regular vs direct mutual funds, ensure you check the expense ratio before investing. A lower expense ratio and a higher NAV typically indicate a direct mutual fund, while regular plans usually come with a higher expense ratio but offer access to expert advice.

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