Direct vs Regular Mutual Fund: Know The Difference

5 mins read

Technically, there is no such thing as a direct mutual fund or a regular mutual fund. Instead, the same mutual fund may be sold either through a broker, or directly to investors. Direct vs regular mutual fund plans are therefore either offered directly to investors, or in the regular/ traditional manner, sold via a broker.

The essential difference between direct and regular mutual fund plans, is not just the presence of a middleman, but the fees and services linked to the broker. In this post, we will explore the difference between regular and mutual fund plans and the benefits of regular vs direct mutual fund plans.

Regular vs direct mutual fund plans – key differences

Fee structure: In both types of mutual fund plans, you pay an Expense Ratio to the mutual fund house. You pay the fund house for managing your capital for you. In a regular fund plan, the Expense Ratio includes the broker’s commission, whereas in a direct fund plan, this component is absent.

Investment approach: When you choose direct mutual fund plans, you have to research the various mutual funds available on the market and keep a watch on the mutual funds and market indicators, and overall economic scenario so as to manage your investments. In a regular mutual fund plan, your investment advisor does the market research and provides you with strategic advice, options for action and guidance on your portfolio of investments.

Benefits of regular vs direct mutual fund plans

In direct mutual fund plans, you stand to gain benefits such as

  1. A lower Expense Ratio, which translates to a higher amount of earnings. For example, if you paid an expense ratio of 0.20% on your direct plan, you might pay more like 0.70% or 1% or more in a regular mutual fund plan. When you total this up and do all the math about how much the capital you spent on agent commissions would have multiplied had it been invested instead, the amount could end up being fairly sizeable of your earnings in the long run.
  2. Free, logical decision making without any external pressure from a third party. The fact is that financial advisors receive an agent commission and the commission is linked to how much you invest. The amount is different for every asset management company and is linked to volume of business and various other factors such as fund type, size of the asset management company and the investment mode. This creates a conflict of interest because is most lucrative for the agent might not always be what’s best for your portfolio
  3. Some experts theorize that investors could make 20% to 40% more on their investments in the long run if they invested directly, eliminating 1) the commissions cost and 2) the earnings forgone in investments where they lost out due to the financial advisor’s bias emerging from the inherent conflict of interest.

In regular mutual fund plans, you stand to gain benefits such as

Hassle-free investing, because you do not have to scour the market for the mutual funds that are likely to provide the best returns. If you were to choose your own mutual fund investments, you would need a thorough understanding of the stock market, because when you invest in a mutual fund, your capital is pooled with other investors and invested in either bonds or stocks or most often, a combination of the two. You would also need to invest sufficient time in observing how the stocks and sectors related to your mutual funds are performing, track benchmark indexes, news and learn to time your entries and exits to maximize earnings. When you use regular mutual fund plans, your financial advisor ideally shoulders the responsibility of guiding your investment choices so as to maximize gains. This is why most people who have demanding jobs and a hectic schedule, prefer to go with regular mutual fund plans.

Risk management advice is an invaluable positive of regular mutual fund plans because your financial advisor is supposed to help you protect your capital. They achieve this by ensuring that your portfolio is diversified, helping you avoid buying in at inflated unit prices and enabling if there are any signs of falling prices that will impact your earnings in the long term. Brokers are also usually expected to be trained and experienced enough to tell you when to avoid selling in panic and when to let go of a low-returns investment and cut your losses.

Considering the above, you also gain savings by way of minimizing faulty investment decisions which might far outweigh the percentage paid towards brokerage.

Conclusion

Direct mutual fund plans are ideal for investors who have a sufficient background understanding of the stock markets and sufficient time to track their investments and the market on a regular basis. Regular mutual fund plans are for investors who would not know with certainty which mutual funds to pick, how to time buys around unit pricing and how to time exits so as to maximize earnings. Emotional investors are probably best off with regular mutual fund plans.