Direct Vs Regular Mutual Funds: Which Are Better?
Mutual funds have become very popular for people who want to grow their money smartly. Investing in mutual funds works by pooling money from different investors who wish to invest in similar opportunities. Experts look after these funds and spread the money across various types of investments depending on the type of the Mutual Fund. They may invest in bonds, stocks, exchange-traded funds (ETFs), and government securities.
There are two major types of mutual funds - direct and regular. Direct plans let you invest directly with the fund house while regular plans involve an intermediary like an agent or a broker.
Each type has its advantages, depending on your financial goals. Let us delve deeper into the concept of direct and regular mutual funds in this blog.
Overview Of Direct Mutual Funds
Direct mutual funds are investment alternatives that investors may buy right from the asset management company or fund house, bypassing any intermediaries. Absence of any middlemen, like brokers or financial consultants, lowers the cost since they do not pay commissions or fees to third-party middlemen.
For example, a lump-sum investment of INR 1,00,000 into Bandhan Small Cap Direct Fund can yield a return of 30.01%, making it INR 2,19,7592.
These mutual funds put the investor into the driver’s seat, wherein they possess significant control over their portfolio to direct it towards the fulfilment of their goals. They can choose where to invest, perform fund comparison and track performance, without third-party reliance.
Let us now explore its advantages in more detail.
Direct Mutual Funds Benefits
A comparative analysis of regular vs direct mutual funds is incomplete without exploring the benefits of the direct funds.
1. Expense Ratio: Since direct mutual funds do not have to offer fees or commissions to agents, their expense ratios are lower than those of regular funds.
For example, the expense ratio of Invesco India Small-Cap Direct Fund is 0.40, and that of Invesco India Small-Cap Regular is 1.733
2. Net Asset Value: In the case of regular plans, funds must pay for various costs, including distribution, marketing, and administration, in order to administer the fund. In the case of direct plans, the entire capital is invested, whereas in the case of regular plans, a part of it goes to meeting these expenses. Therefore, NAV increases for direct plans.
3. Returns: Direct mutual funds frequently produce somewhat greater returns than conventional funds since they have lower cost ratios and no commissions or trading fees. Therefore, the investment in direct plans might provide more earnings.
For instance, Invesco India Small-Cap Regular gave a three-year return of 24.21%, while the Invesco India Small-Cap direct return was 25.06%4
4. Greater control: In the case of direct plans, the mutual fund investors have greater control over their portfolio, compared to the regular plans.
Now, let us explore the next aspect of the regular vs direct mutual fund, that is, an overview of the regular mutual funds.
Overview Of Regular Mutual Funds
In the case of regular mutual funds, investors purchase mutual fund units through intermediaries, like brokers and financial advisors. They provide services including portfolio maintenance and investment guidance. They can assist investors with transactions as well.
For example, a lump-sum investment of INR 1,00,000 into Bandhan Small Cap Regular Fund can yield a return of 28.18%, making it INR 2,10,609.
Investors here benefit from the experience of advanced financial experts. However, investors may receive lower absolute returns from regular mutual funds than from direct ones because the fund house has to pay a commission to intermediaries for their services.
Now, understanding the key advantageous characteristics of regular funds is necessary to effectively understand the regular vs direct mutual fund.
Also Read: Fixed Income Mutual Funds in India: Benefits, Returns & Smart Alternatives
Benefits Of Regular Mutual Funds
Discussed below are the key advantages of the regular mutual funds that can help in understanding the regular vs direct mutual fund analysis better.
1. Assistance and guidance: Regular funds provide financial counsellor advice. They are useful for beginners who want preliminary guidance. They assist investors in selecting appropriate funds depending on their investment goals and risk appetite.
2. Consistent monitoring: The experts monitor the functioning of a portfolio and make recommendations for adjustments as necessary. Investors don't have to focus on continuous market surveillance.
3. Personalisation with expert assistance: The distributor or financial adviser helps investors develop a personalised investment plan that aligns with their financial objectives. It aids in navigating market swings and maintaining focus on long-term goals.
Now, let us summarise the comparative analysis of regular vs direct mutual funds.
Direct Vs. Regular Mutual Fund Plans
Characteristic |
Direct Mutual Funds |
Regular Mutual Funds |
| Expense Ratio | Lower expense ratio because there are no commissions or fees paid to intermediaries. | Higher expense ratio due to commissions paid to brokers or advisors. The commission charges are included in the overall expenses of the fund. |
| Capital returns | All other thing being the same, typically higher NAV due to the lower expense ratio. It allows more of your investment to actively generate returns. | The portion of your investment generating returns is reduced. |
| Target Investors | Ideal for investors who prefer to manage their investments independently based on self-research. | Ideal for investors who seek guidance from financial advisors or prefer the convenience of having a broker manage their investments on their behalf. |
Let us also take an illustration to break down the impact of the expense ratio on direct and regular mutual funds.
Suppose A made an SIP of INR 10,000 in the XYZ direct mutual fund, while B made an SIP of the same amount in the XYZ regular mutual fund. Assuming the following return rate, the table also shows their yield after 20 years.
- A invests in the XYZ direct fund
- B invests in the XYZ regular fund
Let the Gross Return be 12% annually
| Expense ratio = 0.5% | Expense ratio = 1.5% |
| Net return = 11.5% | Net return = 10.5% |
Total corpus value after 20 years
| Total Corpus = INR 93,39,666 | Total Corpus = INR 81,75,968 |
However, the capital gains from mutual fund investment are further diminished by the taxes payable. Therefore, the return must be adjusted accordingly to compute the actual rate of return.
Taxation In Direct vs Regular Mutual Funds
The classification of direct and regular mutual funds is made based on the mode of fund management. The taxability of mutual fund capital gains is determined based on holding tenure, date of purchase and asset allocation6. Subsequently, the tax rates applicable to regular vs direct mutual funds are not distinct, meaning that the tax rate applicable to direct funds is the same as that applicable to indirect funds.
However, given that direct plans offer greater gains compared to regular plans, taxes on direct plans might be more than those on regular plans.
For instance, the net tax payable on an INR 1,00,000 return from a direct mutual fund must be more than that payable on an INR 90,000 return from a regular plan, even though the tax rate remains the same.
Moreover, another question remains, which is how to identify a fund as a direct fund or a regular fund.
How To Recognise If A Mutual Fund Is Regular Or Direct
Many investors find it difficult to distinguish between regular and direct funds. This ultimately results in selection errors. To assist you in distinguishing between regular and direct mutual funds, here are some important indications.
1. Expense Ratio: Regular plans often have higher expense ratios compared to direct mutual funds. Comparing this ratio can help identify a regular vs direct mutual fund.
2. Fund Name: Direct mutual funds use the words Direct or Dir in their names, whereas regular mutual funds often use the words Regular or Reg.
3. Consolidated Account Statement: Check your CAS to see whether a fund is regular or direct. Search for the Advisor section. In regular plans, this field will have the letters 'ARN' accompanied by a number.
However, individual temperament changes over time. An investor who might find regular plans suitable once might prefer direct plans after a period. Therefore, let’s understand how and when to switch from a regular to a direct mutual fund.
Moving From A Regular Fund To A Direct Fund
Let us first understand when we should consider switching from direct to regular plans, and subsequently, we will move on to exploring the procedure for doing so.
When To Switch?
Discussed below are situations in which an investor might consider switching to direct plans from regular plans.
- Experience: If an investor considers that he possesses sufficient fiscal know-how to actively manage his funds and desires greater portfolio control, he might consider choosing a direct plan.
- Exit Load: A switch after the termination of any applicable exit load period might be fiscally prudent.
- Tenure: If the holding period is short after the switch, the impact of it might not be visible on the portfolio. Therefore, an investor should consider the horizon before investing.
- Management: If the investor has access to optimal continuous and analytical monitoring, they might consider a switch.
Now that we know when to consider a switch to direct plans, let us explore how to do it.
Process Of Switching From Regular Funds To Direct Funds
Follow the steps below to turn your regular fund into a direct fund.
Step 1: Compare the expense ratios and other features of direct and indirect plans, along with the exit load requirements, if any.
Step 2: Create an optimal tax plan and analyse the impact of the switch.
Step 3: Now, the actual switch can be done digitally and in person.
ONLINE
- Visits the online portal of the AMC, investment platform or any other website from which the investment is made.
- Locate the specific regular plan holding.
- You can choose the option switch, redeem and purchase or any other such option.
- Choose the direct plan of the particular fund.
- Enter the amount, units and other details.
OFFLINE
Visit the required AMC or investment brokerage company. A designated personnel will guide you through the process.
Conclusion
The decision between direct and regular mutual funds is based on your preferences. Direct funds may be the best option if you have experience and a thorough understanding of the market. However, if you are new to investing in mutual funds, regular funds provide additional benefits, expert guidance and ease.
However, an optimal investment strategy does not only require a choice between distinct classes but also diversification across assets.
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Frequently Asked Questions On Direct Vs Regular Mutual Funds
1. Which is a better mutual fund option: direct or regular?
The choice between direct and regular mutual funds hinges on individual needs. Direct plans offer higher returns with lower costs but require self-research. Regular plans offer advisor guidance but come with higher fees.
2. What are the downsides of direct mutual funds?
Direct mutual fund investors may rely solely on past performance, neglecting other factors that may affect their returns negatively. They must monitor their portfolio regularly and make adjustments based on market conditions and financial goals.
3. Why direct mutual fund is a better option than a regular mutual fund?
Regular mutual funds have a higher expense ratio because of commissions and brokerage, resulting in lower NAV compared to direct plans. Direct plans offer higher returns due to their lower expense ratio.
References
1. The Economic Times, accessed from: https://economictimes.indiatimes.com/mf/mf-news/indian-mutual-fund-industry-aum-grew-20-cagr-in-past-10-years-vs-8-in-us-franklin-templeton-india-mf/articleshow/121953189.cms?from=mdr
2. Value Research Online, accessed from: https://www.valueresearchonline.com/funds/best-mutual-funds/?return-period=3Y&plan-type=2
3. Value Research Online, accessed from: https://www.valueresearchonline.com/funds/best-mutual-funds/?return-period=3Y&plan-type=1
4. Value Research Online, accessed from: https://www.valueresearchonline.com/funds/best-mutual-funds/?return-period=3Y&plan-type=1
5. Value Research Online, accessed from: https://www.valueresearchonline.com/funds/best-mutual-funds/?return-period=3Y&plan-type=2
6. Income Tax India, accessed from: https://incometaxindia.gov.in/Documents/Left%20Menu/HUF-Income-from-capital-gains.htm
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