Recently I was Thinking of Investing in Mutual Funds, So I headed Over to the Mutual fund website to Invest Money Online. After Registering on Website the first Option I had to Select was whether I wanted to invest in Direct or Regular Mutual Funds. This a Question all face while Investing for the first time. So in this article, we will tell you the difference between Direct vs Regular Mutual Funds & Which one Should you Pick?
A Lot of People out there still don’t know the difference between Direct Mutual Funds or Regular Mutual Funds. In Regular Mutual Funds, you buy Mutual Funds through a Distributor/Broker and In Direct Mutual Funds, you buy Mutual Funds Directly from the Fund House without Any intermediary in Between both the Parties. In Regular Mutual Funds, Commission is Paid to the Distributor from the Returns your fund makes & In Case Direct Mutual funds no Commission is paid as there is no Middleman/ Distributor.
History of Direct & Regular Mutual Fund Plans
Till 2012, there was no Concept of Direct Mutual Funds you had to buy Mutual Funds from a Distributor/Agent/Share Broker, you could not buy Mutual Funds directly from the Fund House.
In 2012, SEBI Came up with Various Reforms one of them was to Introduce the Concept of Direct Mutual Funds. Where you can buy Mutual Funds directly from the Fund House without the need of Broker.
Effective from 01/01/2013 in Mutual Funds you had two options to buy A Regular Plan & A Direct Plan. In the Same Scheme of the Same Fund House, you had the Option to Buy Direct & Regular Plans.
Direct vs Regular Mutual Funds
Direct & Regular Plans are Options to Buy Funds of Same Mutual Funds House, run by the Same Fund Manager who Invests in the Same Securities.
The Only Difference is that in Regular Mutual Funds your Mutual fund house pays a commission to the Broker as a fee for referring you to make Investment in that Particular Mutual Fund.
In the case of Direct Plans, there is no Middleman hence no Commission is paid to Anyone which comes back to you back in form of More Returns which means more money to you rather than paying to your Broker.
To understand Better let us Compare Direct & Regular Mutual Funds Nippon India Small-Cap Fund (Previously Known as Reliance Small Cap Fund). Mr A & Mr B Decided to Invest in Nippon India Small-Cap Fund Rs.10,000 p.m. for 5 Years Starting from 01/04/2013. Only Difference was Mr A Invested in Direct Plan & Mr B Invested in Regular Plan of the Same Schemes.
Now let us see how their Investments Performed Over Next 5 Years –
(Source:- Moneycontrol SIP Calculator )
As we See Mr A got Rs.46,027 more than Mr B and Extra CAGR of 1.45% p.a. The Difference of Rs.46,027 is what Mr B Paid to his Distributor by Investing in Regular Plans. So Direct Plans Returns Always Outperform Regular Plans Returns.
On Average Expense Ratio of Regular Equity Mutual funds is 2.02% whereas the Expense Ratio of Direct Equity Mutual Funds is 1.22%. So you can see we earn extra 0.80% Every Year by just investing in Direct Mutual Funds.
Let us Compare More Points of Direct & Regular Mutual Funds:-
|Particulars||Direct Plans||Regular Plans|
|Advisory Service||No||Yes from Agent|
|Convenience||Easy to Invest But you have to reach out to the Fund House.||East to Invest with Distributor/Broker|
Also Read:- Various Ways to Invest in Mutual Funds
Benefits of Investing in Direct Mutual Funds
The Biggest Benefit of Investing in Direct Mutual Funds is that you get Extra Returns Over Regular Plans due to Lower Expense Ratio.
As Seen in the Example Above Mr A Got Extra 1.45 Returns Over his Investment which he got just because he invested in direct plans of Mutual Funds. This 1.45% resulted in an extra Rs.46,027 for Mr A Over A Period of 5 Years. If the Investor wishes to Invest for Long Term Say 10 Years or More this Amount would Increase Drastically.
As per Research conducted by Market Experts, If you Invest in Regular Plans for 25 Years at Rs.5000 p.m. you would give away Rs.28 Lakhs just in Commission to the Agents over & Above your Final Corpus.
At the Same Time if you Invest in Direct Plans you will make Rs.28 Lakhs extra for yourself without doing anything Special, Just Investing in Direct Plans of Mutual Funds.
Benefits of Investing in Regular Mutual Funds
While Direct Mutual funds low cost but that does make Regular Funds a Bad Choice. There are Benefits of Investing in Regular Mutual Funds as well.
In the market, there are more than 1000 Mutual Fund Schemes to Select from which can be Really Confusing at times as to which scheme you should Invest.
This is where an Advisor can help you in making a better decision based on your financial goals, risk profile & available time in hand. He then Researches the fund Suitable for you & Invests your Money in those schemes.
He doesn’t charge an upfront fee to you but Every Year Out of your Return Some Amount is paid to him as fees. Regular Plans can increase your Expense Ratio but if you are a Retail Investor & need guidance then you should definitely but Plans from Distributors, this can cost you around 1% but can really help you in the Long Term.
How to Check If You Are Invested in the Direct Plan or Regular Plan
This is Really Simple if you want to check whether in the Past you have invested in Direct or Regular Plans.
The Account Statement/ Holding Statement will clearly tell you in which Scheme you have Invested, which type of plan you have chosen, whether you have chosen Direct or Regular Plan.
You can Check Account Statement Physical Copy Received (If Any), Account Statement is Also sent on mail by fund houses you see that as well If you Unable to find the Statement then you download/request the Fund House to send you the Latest Statement on Mail via visiting their website, Call to the Official Number or Visiting Fund House Registered office in Person & Asking for Physical Copy of the Statement.
These are differences between Direct vs Regular Mutual Funds, you can make your investment decision on the basis of Above Factors. If you have any question do let us know in the Comments Section Below and we will make sure to reply & Thank You very much for Reading