Looking for investing in the mutual funds but confused between direct vs regular mutual fund?
Unable to understand what are direct mutual fund or regular mutual fund, which one is right for you for long term, and much more.
Well, I heard you hence, today I have provided an in depth guide on this topic.
So let’s get started!
Table of Contents
What Are Mutual Fund?
Before understanding what are direct and regular mutual funds let’s understand what are mutual fund basically.
A mutual fund is a investment type where they collect the money from thousands of small investor and manages this money on their behalf by investing it further in equities, debt instruments, etc.
Now till 2012, in India the mutual fund investment occur through the mutual fund distributors or agents.
But from 1 January 2013, the SEBI introduced Direct Plans for all their open end mutual fund schemes for the first so that now you can also invest in the mutual fund directly too.
Now let’s look out what are these direct vs regular mutual fund.
Direct Mutual Fund
Direct Mutual Fund are those fund that are directly purchased from the asset management company or mutual fund house instead of a mediator.
Here you are the prime and the only decision maker about your investment and no one can else influence you for their benefits.
Thus, all your money got invested in your mutual fund.
Regular Mutual Fund
Unlike Direct Mutual Fund, Regular mutual funds are those that are purchased through a mutual fund distributor or agent that act as a mediator between you and mutual fund house.
These agents do all the paper work on your behalf and submit these documents to the mutual fund houses.
For giving this service, these agents charge an indirect fee from you that is in the form of commissions they get from such asset management companies or mutual fund houses.
Thus, the total money you invest never actually get invested into the fund, but a small part from your investment also goes to these agents in form of commissions.
Regular vs Direct Mutual Fund
Now let’s compare both direct and regular mutual funds on certain parameters.
Expense Ratio
- Direct Mutual Fund – They are purchased directly through mutual fund houses, hence due to the zero involvement of any middle men the expense ratio of direct funds are low.
- Regular Mutual Fund – They are purchased via mutual fund distributor or agents due to which the total money you invest in regular mutual fund, never get’s invested as the mutual fund houses pay a commission to these distributors from the mutual fund management fees they are charging from you, hence these mutual fund have higher expense ratio.
Net Asset Value (NAV)
The Net Asset Value (NAV)will always be higher for direct plan compared to regular plan because NAV is calculated by taking the total fund the asset management company received divided by the total number of units of that mutual fund.
While in regular plan because a part of your investment goes first to the agents that’s why the amount you invested never get’s fully invested in that mutual fund.
Transparency
- Direct Mutual Fund – When you invest in any mutual fund directly through the asset management company then you got more transparency in their performance and fees.
- Regular Mutual Fund – When you invest your money by believing on any agent then they try to sell you those plan that will give them instead of you the most advantage hence, the transparency is very low is regular plan.
Profitability
Let’s say if you do a SIP of Rs. 5,000 every month in a mutual fund.
Then let’s see how the final return will vary in case of Direct vs Regular Plan if just 1% commission is paid to the agents in regular plan (hence generating 1% lesser returns compared to direct plan)
Direct Plan Returns
Your Final Amount after 25 years Will Be: ₹9,587,117.79
Regular Plan Returns
Your Final Amount after 25 years Will Be: ₹8,030,145.39
Hence, you can check that by just 1% lesser return in regular plan due to higher expense ratio or the commission paid to the agents can create a ₹15.5 Lakh difference in final returns over 25 years.
To calculate your SIP or mutual fund returns, you can use our free SIP Mutual Fund Returns Calculator
Key Difference Between Direct and Regular Mutual Fund
| Feature | Direct Mutual Funds | Regular Mutual Funds |
|---|---|---|
| Cost | Lower expense ratio (no commissions) | Higher expense ratio (commissions included) |
| Advisory Support | Minimal or none | Personalized advice from brokers |
| Transparency | High (direct access to AMC information) | Varies based on broker |
| Control | Greater control over investments | Relies on broker recommendations |
| NAV | Higher NAV | Lower NAV |
How To Know Whether A Mutual Fund is Regular Plan or Direct Plan?
Well, this is very easy to check whether your invested mutual fund is direct or regular plan.
If your mutual fund scheme is a direct scheme or direct plan then in the name of that mutual direct will be mentioned.
While if your mutual fund plan is regular one then regular will be mentioned in it’s name instead of writing direct as per above image.
How To Switch From Regular To Direct Plan
Now as you are aware that how much profitable it is to invest in direct mutual fund compared to regular mutual fund.
Let’s see how you can switch from regular to direct plan if by mistake you have already invested into a regular plan.
1. Switching Online
If you invested in the mutual fund through online method then you can login to your trading or mutual fund account.
There by selecting the regular mutual fund you have invested in, lookout for the option of switching to direct plan.
If no such option is available then you can contact your broker or the best person from whom you purchased your mutual fund and ask them if they have any option to Switch from regular plan to direct plan.
Do remember if you have invested in a mutual fund that has lock in period like the tax-saving funds then you can’t switch or sell the mutual fund before serving that lock in period.
2. Redeeming The Mutual Fund
If there is no option available to switch from regular to direct plan, then you can sell or redeem your mutual fund.
Once, you receive the money in your bank account you can invest in a new direct mutual fund.
For this you can choose different brokers like Indmoney, Groww, Coin By Zerodha, Etmoney, etc.
All these brokers offer direct mutual fund plan so that you can save more in expense ratio.
Do remember if you have made some profit over your investments in mutual fund then you will have to pay the income tax on it.
To know how much tax you have to pay on it checkout our mutual fund taxation guide.
Final Words – Direct vs Regular Mutual Fund
Investing in mutual fund always may look complex if you are beginner due to so many different option available in it.
While from above discussion, I hope you got to know how a regular plan keeps eating the additional profit that you can make up if you have opted for direct plan.
Thus, I always advise to invest in direct mutual fund rather then regular one.
Disclaimer: The Honest American provides financial education, investing strategies, & stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
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