Direct vs. Regular Mutual Funds: A difference of ₹13 lakh in the same scheme! Understand where it is beneficial for you to invest..

Direct vs. Regular Mutual Funds: If you invest in mutual funds via SIP or plan to make a lump-sum investment, you have likely come across the options of 'Direct Plan' and 'Regular Plan.' At first glance, both appear to be part of the same scheme; they share the same fund manager and the same portfolio of stocks. However, when it comes to long-term returns, the difference between the two can amount to lakhs of rupees.

Let us understand in simple terms the difference between regular and direct mutual funds, how a 1% saving impacts your wealth, and which option you should choose.

What is a Regular Mutual Fund?

A regular mutual fund is a plan purchased through an intermediary—such as a mutual fund distributor, bank, agent, or financial advisor. Under this plan, the Asset Management Company (AMC) pays a fixed annual commission to the distributor for your investment. This commission is not charged separately but is included in the fund's expense ratio. Consequently, the expense ratio of a regular plan is always higher than that of a direct plan.

What is a Direct Mutual Fund?

A direct mutual fund is a plan purchased directly from the Asset Management Company's (AMC) website or registered direct platforms, without involving any agent or broker. Since there is no intermediary, the AMC does not have to pay any commission to an agent.

Due to the absence of commissions, the expense ratio of a direct plan is significantly lower. The money saved on commissions boosts your Net Asset Value (NAV), allowing you to reap greater benefits from compounding.

Here are the key differences between Regular and Direct Mutual Funds

Direct vs. Regular Mutual Funds: Key differences between Regular and Direct Mutual Funds

How does a 1% difference lead to a gap of ₹13 lakh?

Investors often wonder what difference an expense ratio of 0.5% or 1% could possibly make. Let us understand this with a simple example. Suppose you invest ₹10,000 per month via SIP for 20 years, and the fund generates an average annual return of 12%:

Regular Fund (1.5% expense ratio): Your effective return will be approximately 10.5%. After 20 years, your total corpus will amount to ~₹75 lakh.

Direct Fund (0.5% expense ratio): Your effective return will be 11.5%. After 20 years, your total corpus will amount to ~₹88 lakh.

In other words, simply by choosing a Direct Plan—without taking on any extra risk—you could earn an additional profit of over ₹13 lakh.

Where should you invest: Direct or Regular?

You should choose a Direct Plan if: You have a basic understanding of mutual funds and market fluctuations; you can conduct your own research to select the right scheme; and you are comfortable managing your portfolio yourself via online apps or AMC portals.

You should choose a Regular Plan if: You are new to the market and unsure which fund to select; you lack the time for portfolio review and rebalancing; and you are willing to pay a small commission in exchange for personalized advice from a certified distributor.

If you are capable of making your own financial decisions, Direct Mutual Funds are the best option for wealth creation. They reduce costs, thereby enhancing the magical benefits of compounding. However, if you require continuous expert guidance, opting for a Regular Fund is better than risking losses by choosing the wrong fund.

Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.