Direct Vs Regular Mutual Funds: 3 Reasons why direct is better

Every mutual fund is available to the investors in two versions – Direct and Regular. Regular plans involve an intermediary who manages the investments on the behalf of the investor, whereas in the direct plan, the investor directly deals with the AMC (as shown in the figure).

These versions are only the options available to the investor in the market which are offered by the same fund. The invested amount from both options is managed by the same fund manager and has the same allocation of the assets in the fund’s portfolio. Only the road taken by the flow of money from an investor to the AMC is a different one.

Direct Mutual Fund

Direct Plan is directly offered into the market by the AMC (Asset Management Company) or the fund house. The investor can perform his/her own research based on their risk appetite, time horizon, and goals and then make a choice based on these parameters. There is no distributor or intermediary involved, hence reducing the expense ratio (management fees charged by the fund house to the investors).

These plans can be easily identified as they are prefixed with the word “Direct” as a part of their name. The investors can choose an offline or an online mode to buy units of the fund. Investors who can perform their research, who also have the time and capability for managing their portfolio, prefer these plans.

Regular Mutual Fund

Regular Plans involve an intermediary and the investors invest through these distributors into the fund offered by the AMC. The intermediaries charge a commission or fee for their services to the fund house.

This fee is charged to the investor as a part of the expense ratio, hence the net fee when compared to the direct mutual funds. Due to the higher expense ratio, the returns tend to be lower than the direct plan counterparts. These plans provide convenience and are preferred by investors who have lesser knowledge about the markets.

Why Are Direct Plans Better?

1. Lower Expense Ratio 

Did you know that you pay for the financial advice that the distributor gives you? The intermediaries charge it to the fund house as commission. But this commission paid to the advisor is charged as a part of the expense ratio to the investor. Hence, the investor indirectly pays the intermediary.

The fee which is deducted for the advisor varies between 0.5% to 1%. In the case of a direct mutual fund, there is no intermediary, hence there are no distribution charges or commissions to be paid, resulting in a lower expense ratio. Over a longer horizon, the small % of fees paid out of your pocket makes a large difference to the final corpus that is accumulated. 

Consider the Axis Bluechip fund which has earned the following returns over the last 5 years and has beaten its benchmark (Nifty 50 TRI). Consider two scenarios where the investor invests Rs 10 lakh into this fund through a Direct plan in one case and in a regular plan in the other. However, the small difference of 1.44% leads to a large change of Rs 1.36 lakhs to the final wealth that is accumulated. ^{(Data of returns are from AMFI website)}

2. Higher Returns

The returns from a direct plan are always higher than the returns from the regular plan, owing to the higher expense ratio. Returns being one of the most important factors for cherry-picking the fund of your choice, this difference should be taken into consideration. Some of the examples of the funds are as follows: ^{(Data of returns are from AMFI website)}

3. Higher NAV

Net Asset Value or NAV = Assets of the fund – Liabilities of the fund / Number of units of the fund

The assets owned by the fund include equity or stocks invested by the fund, debt instruments such as debentures or government securities and cash. The liabilities of the fund include money owed to banks, fees to distributors or other associated entities, etc.

In the case of the direct plan, due to the absence of the fees, the Net Assets (Assets – Liabilities) is higher resulting in a higher NAV. Whereas in the regular plan the fees/commission to the distributor or intermediary forms a part of the liabilities, reducing the NAV. A higher NAV would imply a higher investment value.

Conclusion

In conclusion, apart from the above benefits, one is always in control of their investments and is also well informed about the turbulences in their portfolios and aids in taking an active approach towards the financial goals.

A tiny % of difference can multiply to a larger difference to the final returns from your portfolio. One can learn about the AMC, the mutual fund options available that suit your risk profile from the services offered by wealth management sites such as EduFund, with a minimal fee, when compared to the expense ratios of a regular plan.

The next time that you plan on investing in a mutual fund, go for a direct plan. It will surely involve some initial research and some preliminary work, but you would be able to reap long-term benefits from making this wise choice.