Direct Vs Regular Mutual Funds (Everything You Need to Know)

Direct mutual fund investment is when you buy mutual fund units directly from a mutual fund company (either from their website or any portal which offers direct mutual fund investment like Zerodha, or ETMoney). 

Whereas a Regular mutual fund is what you buy through an intermediary such as an advisor, a broker, or a distributor. Sharekhan is an example of a regular mutual fund intermediary. 

In a regular plan, the mutual fund house pays a commission to the intermediary against their sales which they recover from the investors.  Regular plans then become more expensive than Direct plans.

Direct and regular mutual funds have 5 major differences that we would cover in detail in this article and the end, you’ll come to know which plan is ideal for you.

Before going into the detailed comparison, let’s have a look at the quick comparison between direct mutual funds vs regular mutual funds.

Direct Vs Regular Mutual Funds (Quick Comparison)

DetailsDirect PlanRegular Plan
Expense RatioLower

Higher
(commission to the broker or intermediary)
NAV ValueHigherLower
IntermediaryNoYes
ConvenienceLessMore
ReturnsMore as the expense ratio is less Lower returns
Who Should InvestPerfect for investors who have the knowledge of market and fund analysis
Beginners because the qualified intermediary may help in fund selection as per your goal and risk appetite

Also read – Top performing mutual funds in India

What are Direct Mutual Funds

When you invest directly in a mutual fund offered by any fund house or Asset Management Company (AMC) without going through an intermediary, that fund is called a Direct mutual fund.

A mutual fund company website may look like this – 

mutual fund house

Intermediaries could be brokers like Zerodha, Motilal Oswal or distributors like HDFC bank. 

Since there are no third-party agencies involved, you don’t have to pay any commissions or brokerage that reduces the expense ratio of that mutual fund. Since the expense ratio of a direct mutual fund is lower, the return is higher.

You can easily identify direct mutual funds on any financial portal as the ‘Direct’ is prefixed in the name of the fund.

mutual fund direct plan

You can buy direct mutual funds either online or offline through the direct fund house, or you can also buy online through some brokers who offer direct mutual funds investment. 

Most leading brokers like Zerodha, Upstox have also started offering direct mutual fund investments. 

Advantages of Direct Mutual Funds

  • Low expense ratio as no third-party commission involved
  • High returns because of low expense ratio
  • Higher NAV value as the expense ratio is low

Disadvantages of Direct Mutual Funds

  • No advisory in mutual funds selection
  • Spare time to do regular portfolio monitoring 

What are Regular Mutual Funds

When you buy a mutual fund through an intermediary like a broker or a distributor, that mutual fund comes under Regular plans. Sharekhan is an example of a regular mutual fund intermediary.

Regular fund intermediary

These third parties charge some commission from AMCs for selling the mutual funds and the fund houses recover that commission from investors through expense ratio. 

That’s the reason the expense ratio of a regular mutual fund is slightly higher than a direct mutual fund. 

A regular mutual fund is ideal for investors who are beginners and do not have enough knowledge about the market or portfolio management. 

You have to pay a nominal fee to the broker but you receive expert advice that would eventually keep you on the right investment track.

Advantages of Regular Mutual Funds

  • Expert advice in mutual funds selection
  • Continuous portfolio monitoring and portfolio rebalancing
  • Value-added services like providing tax proofs during tax filing, facilitating redemptions

Disadvantages of Regular Mutual Funds

  • Higher expense ratio
  • Lower NAV value
  • Lower returns because of the high expense ratio and low NAV

Since you are now aware of direct and regular mutual funds along with their advantages and disadvantages, it’s time to compare both schemes in detail. Let’s start.

Direct Vs Regular Mutual Funds (Detailed Comparison)

#1. Expense Ratio

An expense ratio is an annual fee charged from investors by a mutual fund house. 

A high expense ratio drastically reduces your return on investment because you have to pay more fees which are deducted from your invested funds affecting the compounding interest generated on the investment in the long run. 

Direct mutual funds have a low expense ratio as compared to regular mutual funds. Since you are investing directly with the fund house, you don’t have to pay any additional commission to the intermediary. 

For example, if you invest Rs. 10,000 in SIP every month for 10 years, a 1% difference in expense ratio will save you nearly Rs. 1.24 lakh, if we assume an 8% annual return on your mutual fund’s investment.

The snapshot below will help you understand further –

Expense ratio difference

#2. Net Asset Value (NAV)

Direct mutual funds have a higher NAV than regular mutual funds which eventually leads to higher returns (will discuss returns in next section, let’s first discuss how NAV works).

NAV or Net Asset Value is the price of a single mutual fund unit, similar to the share price of any stock. NAV is calculated as below –

NAV = (Total Assets – Liabilities) / (No. of units outstanding)

Since a fund house has to take care of expenses to manage the mutual fund schemes. All these expenses collectively form the expense ratio of that scheme. The fund house reports the NAV of any mutual fund scheme after deducting these expenses.

That means that when the expenses are higher, they will reduce the NAV of the mutual fund. 

This is what happens in the case of regular plans as they have a higher expense ratio, the NAV is lower of the same mutual fund.

On the contrary, NAV is higher when fewer expenses are deducted from the invested money, which again allows more money to be compounded over time which results in higher returns. Let’s discuss return comparison in detail in the next section.

#3. Returns

The lower expense ratio and higher NAV in direct mutual funds eventually lead to higher returns. Because fewer expenses are deducted from the invested money and higher NAV means higher returns per unit price.

Let’s compare both direct and regular plans of the same mutual fund – Tata Large-cap Fund – to understand how much they differ in terms of returns.

Tata Large Cap Fund (Direct) 

#1. NAV and Expense Ratio

Tata large cap direct

#2. Annual Returns

tata large cap direct returns

Tata Large Cap Fund (Regular) 

#1. NAV and Expense Ratio

Tata large cap regular

#2. Annual Returns

tata large cap regular returns

Let’s compare both plans in the table below –

ParticularsTata Large Cap Fund
(Direct)
Tata Large Cap Fund
(Regular)
NAVRs. 382.15 (approx.)Rs. 345.70 (approx.)
Expense Ratio1.67%2.38%
1-year annual returns52.04%50.89%
5-year annual returns17.15%15.82%
Rs. 10,000 invested for 1 year would becomeRs. 15,204Rs. 15,088
Rs. 10,000 invested for 5 years would becomeRs. 22,073Rs. 20,852

You can see in the above table that the difference in 1-year return is merely Rs. 116 and which eventually become Rs. 2,000 difference in 5-year returns of both schemes against Rs. 10,000 investment. 

Now, what if the invested amount is Rs. 1,00,000 or higher, for a longer-term of 10 years or more, the difference would be pretty huge.

#4. Intermediary

Another big difference between direct and regular mutual funds is the presence of an intermediary. 

Direct funds are dealt directly with the fund houses or AMCs, whereas regular funds are invested through a broker or distributor which we call intermediaries.

Intermediary or third-party distributor helps you choose the right fund but take a nominal fee against its services. Investing through a broker is more convenient for a new investor which we’ll discuss in the next point.

#5. Convenience

No doubt direct plans are simple to invest where you can select mutual funds as per your requirements and you take control of your investments.

But if you are a newbie investor, going for a regular plan through an intermediary would be more convenient. Because your broker would help you decide which fund is more aligned to your investment goals and risk appetite.

Secondly, they take care of your fund’s regular monitoring and even help you restructure your portfolio if your fund is not giving returns as expected.

Check out – Best index funds in India

Conclusion – Which is Better Direct or Regular Mutual Fund

If you are knowledgeable about mutual fund selection and clear about your investment goals, you should invest in Direct mutual funds and save money in the long run.

But if you are a beginner who doesn’t have much knowledge about mutual fund investment, then going through an intermediary that would invest in regular mutual funds would eventually be more beneficial.

Because your intermediary agency would help you make the right investment decision which you are unable to do. 

Over time when you are experienced enough, you can start investing in direct mutual funds.

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